[intel352]

yes, the "current" level of categories are retrieved, but not all, so it doesn't recurse deeper

in 4.1, the request for the categories array is handled by this bit of code:

#
# Gather the array of categories and extract into separated arrays:
# $all_categories, $categories and $subcategories
#
if (($current_area == "C" && defined("GET_ALL_CATEGORIES")) || defined('MANAGE_CATEGORIES')) {
	$_categories = func_get_categories_list($cat);
} elseif($current_area == "C") {
	$_categories = func_get_categories_list($cat, true, "current");
} else {
	$_categories = func_get_categories_list($cat, true, "all");
}

note the

defined("GET_ALL_CATEGORIES")

bit of code

the only place i found GET_ALL_CATEGORIES defined was in search.php, so for my site, I added the define to the top of home.php:

define("GET_ALL_CATEGORIES",true);

that fixed up the need for the nested categories. i also fixed up some of the logic (if statements) in the code. i'll prepare a proper post tonight with full instructions (will be similar to your first post)