All, Hope this helps. I got this from X-cart technical support. It works well for me and my version ... I would just like to know how to turn the thumbnail/icon into a hyperlink that matches the category title. If anyone knows how to do that please post a reply.
X-Cart shows a category icon only if the category has subcategories only and no products in it.
If you would like to show category icon near each category name in the customer's area, you should modify x-cart template skin1/customer/main/subcategories.tpl and replace in the file
{if $subcategories}
{if $tmp} [img]{if $current_category.icon_url}{$current_category.icon _url}{else}{$xcart_web_dir}/icon.php?categoryid={$cat}{/if}[/img] {/if} <TABLE border="0" cellspacing="5"> {foreach from=$subcategories item=subcat} <TR>
<TD align="left" nowrap width="95%">
<FONT class="ItemsList">{ $subcat.category|escape }</FONT>
</TD>
<TD align="right" nowrap><FONT class="Text">{if $config.Appearance.count_products eq "Y"} {if $subcat.product_count}{ $subcat.product_count } {$lng.lbl_products} {elseif $subcat.subcategory_count}{ $subcat.subcategory_count } {$lng.lbl_categories|lower} {/if}
{/if}</FONT></TD>
</TR>
{/foreach}
</TABLE>
{/if}
with
{if $subcategories}
<TABLE border="0" cellspacing="5">
{foreach from=$subcategories item=subcat}
<TR>
<TD align="left" nowrap width="95%">[img]{if $subcat.icon_url}{$subcat.icon_url}{else}{$xcart_w eb_dir}/icon.php?categoryid={$subcat.categoryid}{/if}[/img]
<FONT class="ItemsList">{ $subcat.category|escape }</FONT>
</TD>
<TD align="right" nowrap><FONT class="Text">{if $config.Appearance.count_products eq "Y"} {if $subcat.product_count}{ $subcat.product_count } {$lng.lbl_products} {elseif $subcat.subcategory_count}{ $subcat.subcategory_count } {$lng.lbl_categories|lower} {/if}
{/if}</FONT></TD>
</TR>
{/foreach}
</TABLE>
{/if}