Magento main menu is construed based on the hierarchy like,

 Root Category → Category → Sub-Category

We will customise the menu to show the Products of a category/su-bcategory along with its hierarchy in dropdown menu as seen below.

This is a good feature if you have less products in a website.

In order to implement the above structure, we need to modify the navigation.php file of drawItem() function like below. The navigation.php is available in the following location,

The code is,

Public function drawItem($category, $level=0, $last=false){
 $html = '';
 if (!$category->getIsActive()) {
  return $html;
 }
 $children = $category->getChildren();
 $hasChildren = $children && $children->count();
 /***** Getting Product List Start ******/
 $cur_category = Mage::getModel('catalog/category')->load($category->getId());
 $_productCollection = Mage::getResourceModel('catalog/product_collection')->addCategoryFilter($cur_category)->setOrder('position', 'ASC');
 $cnt=1;
 $hasProduct1=$_productCollection->count();
 $phtmlChildren='';
 if($hasProduct1>=1){
  $l=$level+1;
  foreach ($_productCollection AS $_product){
   $cur_product = Mage::getModel('catalog/product')->load($_product->getId());
   if ($cur_product->getStatus()){
    $phtmlChildren.= '<li';
    if($cnt==$hasProduct1) {
     $phtmlChildren.= ' class="level'.$l;
     $phtmlChildren.= ' nav-'.$this->htmlEscape($cur_product->getName()).' last';
    }
    else {
     $phtmlChildren.= ' class="level'.$l;
     $phtmlChildren.= ' nav-'.$this->htmlEscape($cur_product->getName());
    }
    $phtmlChildren.= '">'."\n";
    $phtmlChildren.= ' <a href="/'.$cur_product->getUrlPath() . '.html">'. $this->htmlEscape($cur_product->getName()) . '</a>'."\n";
    $phtmlChildren.= '</li>';
    $cnt=$cnt+1;
   }
  }
 }
 /***** Getting Product List End ******/
 $html.= '<li';
 if ($hasChildren || (!empty($phtmlChildren)))
  $html.= ' onmouseover="toggleMenu(this,1)" onmouseout="toggleMenu(this,0)"';
 $html.= ' class="level'.$level;
 $html.= ' nav-'.str_replace('/', '-', $category->getRequestPath());
 if ($this->isCategoryActive($category))
  $html.= ' active';
 if ($last)
  $html .= ' last';
 if ($hasChildren || (!empty($phtmlChildren))) {
  $cnt = 0;
  foreach ($children as $child)
   if ($child->getIsActive())
    $cnt++;
  $html .= ' parent';
 }
 $html.= '">'."\n";
 $html.= '<a href="'.$this->getCategoryUrl($category).'"><span>'.$this->htmlEscape($category->getName()).'</span></a>'."\n";
 $htmlChildren = '';
 if ($hasChildren) {
  $j = 0;
  foreach ($children as $child)
   if ($child->getIsActive())
    $htmlChildren.= $this->drawItem($child, $level+1, ++$j >= $cnt);
 }
 if ((!empty($htmlChildren)) || (!empty($phtmlChildren)))
  $html.= '<ul class="level' . $level . '">'."\n" .$htmlChildren .$phtmlChildren .'</ul>';
 $html.= '</li>'."\n";
 return $html;
}

The below lines in drawItem() function will fetch the current sub-category's product list based on the sub-category id. The $_productCollection has the list of product of selected subcategory by getting the id as $category->getId() function.

We will loop through them and generate the menu structure using <li></li> tag.