Apparently the functions file adds another ul in front of the widget area,
to solve this you have two ways: either via CSS or via functions file.
CSS, add this to your stylesheet at very bottom:
#sidebar ul{list-style:none;margin:5px 0;padding:0;border:0;}
#sidebar li{margin:0;padding:3px 0;background:url(images/cat.gif) no-repeat right center;}
#sidebar li a,#sidebar li a:visited{color:#333;text-decoration:none;}
#sidebar li a:hover{color:#ccc;text-decoration:none;}
#sidebar ul ul{list-style:none;margin:5px 0;padding:0;border:0;}
functions.php file
look for this line in the functions file:
if ( function_exists('register_sidebars') )
register_sidebars(2, array(
'before_widget' => '<div id="%1$s" class="widget %2$s">',
'after_widget' => '</ul ></div>',
'before_title' => '<h2>',
'after_title' => '</h2><ul >',
and replace it with this
if ( function_exists('register_sidebars') )
register_sidebars(2, array(
'before_widget' => '<div id="%1$s" class="widget %2$s">',
'after_widget' => '</div>',
'before_title' => '<h2>',
'after_title' => '</h2>',
however it's better to start with the CSS method.