I don’t understand why this happens, or if it’s a supported function or a loophole of sorts, but if you type in ‘.’ into the Category Base field it seems to solve the problem – but only in certain browsers.
In Internet Explorer, the category links point to domain.com/./categoryname but in Firefox, Camino and Safari, links to categories go directly to domain.com/categoryname/.
Is this what you were after?
I think there is a way. Log into your WordPress installation, go to Options -> Permalinks. Scroll all the way down to the bottom of the page where it gives the option “Category Base”. In that field, type in ‘/’ or ‘.’, and then press ‘Update Permalink Structure’. That does it for me…