For the alignment, you will need to change the list-style from inside to outside, and then give the list items more left margin.
Code:
#categories ul a {/*top categories*/
display: list-item;
list-style: disc outside url(../images/bullet1.gif);/*change to list-style: none; to remove bullet*/
background: no-repeat;
border: none;
margin: 0 0 0 2.3em; /*adjust to taste*/
padding: 0;
}
Repeat for subcategories. Note - the margin might need to be applied elsewhere - I haven't tested this yet.
Using sprites would require fundamentally changing the way category name/image replacement works - the code uses the individual names as triggers for the replacement to happen automatically, and only when there is an image to use. Sprites would require essentially hard-coding for the particular set of categories. So while it would be very nice to reduce the number of image calls, it's not going to happen any time soon unless you want to rework the code.
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