[MoonDog]

I just created something similar to what you need from an old posting a couple of days ago.
I just modified it a little to make it work on v4.1.8

First of all, kudos to the creator and all those that contributed to the original mod.

Start by opening up the xcart/include/categories.php file.
And find these lines of code: (it's at the bottom)

 
if (!empty($subcategories))
$smarty->assign("subcategories", $subcategories);
$smarty->assign("cat", $cat);
?>

And right above those lines of code add:

 
//Subcategories in menu
function sort_by_order_by($a, $b)
{
     if ($a['order_by'] == $b['order_by']) {
       return 0;
   }
   return ($a['order_by'] < $b['order_by']) ? -1 : 1;
}
function func_getallsubcat()
{
$raj =func_get_categories_list("", true, "all");
$raj1=$raj['all_categories'];
usort($raj1 ,"sort_by_order_by");
$ll=array();
foreach ($raj1 as $k=>$val)
{
if($val['parentid']!="0")
{
$ll[$val['parentid']][]=$val;
}
}
return $ll;
}
$smarty->assign("allsubcategories", func_getallsubcat());
//Subcategorie in menu - end
 

Now, replace your skin1/customer/categories.tpl with this modified categories.tpl

 
{* $Id: categories.tpl,v 1.26 2005/11/17 06:55:37 max Exp $ *}
{* modified *}
<div id="sidenavcontainer">
{capture name=menu}
{if $active_modules.Fancy_Categories ne ""}
{include file="modules/Fancy_Categories/categories.tpl"}
{assign var="fc_cellpadding" value="0"}
{else}
{if $config.General.root_categories eq "Y"}
<ul id="mainmenu">
{foreach from=$categories item=c}
{if $cat eq $c.categoryid || $current_category.parentid eq $c.categoryid}
<li><h3><a class="current" href="home.php?cat={$c.categoryid}">{$c.category}</a></h3></li>
{else}
<li><h3><a href="home.php?cat={$c.categoryid}">{$c.category}</a></h3></li>
{/if}
{assign var=in value=$c.categoryid}
{* CONDITIONAL DROP DOWN ITEMS FROM TOP CATEGORY *}
<ul id="submenu">
{foreach from=$allsubcategories.$in item=c }
{if $cat eq $c.categoryid}
<li><h4><a class="current" href="home.php?cat={$c.categoryid}">{$c.category}</a></h4></li>
{else}
<li><h4><a href="home.php?cat={$c.categoryid}">{$c.category}</a></h4></li> 
{/if}
{/foreach}
</ul>
{* /CONDITIONAL *}
{/foreach}
{else} 
{foreach from=$subcategories item=c key=catid}
<li><a href="home.php?cat={$catid}">{$c.category}</a></li>
{/foreach}
{/if}
</ul>
{/if} 
</div>
{/capture}
{ include file="menu.tpl" dingbats="dingbats_categorie.gif" menu_title=$lng.lbl_categories menu_content=$smarty.capture.menu cellpadding=$fc_cellpadding}

And the last thing you need to do is copy the following code and add it to the bottom of your skin1.css file

 
/**
* sidenavcontainer is 181px wide and a minimum of 400px high
* It has a little padding top and bottom as well
* Modify it to suit your layout
*/
html, body, ul, ol, li, p,
h1, h2, h3, h4, h5, h6,
form, fieldset, a {
    list-style-type: none; 
    margin: 0;
    padding: 0;
    border: 0;
}
/*#sidenavcontainer {
    padding:200px 0 10px 0;
    PADDING-LEFT: 20px;
    PADDING-BOTTOM: 10px;
    width:181px; 
    min-height:0px; 
    float:left;
}
*/
h3{    /* PRODUCT CATEGORIES */
    padding:200;
    margin:100;
    font-size:11px; 
    font-style:normal; 
    font-weight:normal; 
}
#sidenavcontainer h3 {
    margin:0 0 0 0px;
    padding:0px;
}
h4{    /* PRODUCT SUB-CATEGORIES */
    padding:0;
    margin:0;
    font-size:11px; 
    font-style:normal; 
    font-weight:normal; 
}
#sidenavcontainer h4 {
    margin:0 0 0 20px;
    padding:20;
    padding-bottom:2px; 
}
#sidenavcontainer a {
    color:#000000;
    text-decoration:none;
}
#sidenavcontainer a:hover {
    color:#FF0000;
    text-decoration:none;
}
#sidenavcontainer .current {
    color:#3333FF;
}
 

And that's it.

- MoonDog -