Right, well you've got an off the shelf, 3rd party template on there from 7dana. Which is fine, no problem at all - it simply explains why it's not default code.
You were asking about showing images for subcats - yes, this is something I do all the time - I think this thread may be the one for it:
http://forum.x-cart.com/showthread.php?t=3848&highlight=subcategory+images