This is an updated set of instructions from the previous post for 1.3x. A few things have changed with 1.4x which rendered the original information obsolete. These instruction will allow you to create a left hand vertical navigation as seen here . For more info see credits / references at the end. These instructions work with the Modern theme. You will have to adjust for other themes.
Following reports of formatting problems I have rewritten this page with the help of SyntaxHighlighter Evolved plugin. Please use the View Source options when copying code. This works with magento 1.3x for instruction for 1.4x please go here