First you should upgrade WPML to the latest version, which is 2.4.3 at time of writing.
To properly translate categories you should start by editing the category of the default language. Once you are in that screen (wp-admin/edit-tags.php?action=edit&taxonomy=category&tag_ID=x&post_type=post where x is the category ID), you will see at the bottom a metabox titled Language. This will show the current language of the category and you will be able to add a translation of it by clicking on the word “Add” under the name of the other language(s) of your site.
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