+Menu
    +Shop
        +Tshirts
            +Yellow
            +Green
        +Pants
    +Forum
        +Ideas

----------------------------
| id | parentID | text     |
|----|----------|----------|
| 1  | null     | Item #1  |
| 2  | 5        | Item #2  |
| 3  | 2        | Item #3  |
| 4  | 2        | Item #4  |
| 5  | null     | Item #5  |
| 6  | 5        | Item #6  |
| 7  | 3        | Item #7  |
| 8  | 5        | Item #8  |
| 9  | 1        | Item #9  |
| 10 | 7        | Item #10 |
----------------------------

$menu = array(
    1 => array('text' => 'Item #1', 'parentID' => null),
    2 => array('text' => 'Item #2', 'parentID' => 5),
    3 => array('text' => 'Item #3', 'parentID' => 2),
    4 => array('text' => 'Item #4', 'parentID' => 2),
    5 => array('text' => 'Item #5', 'parentID' => null),
    6 => array('text' => 'Item #6', 'parentID' => 5),
    7 => array('text' => 'Item #7', 'parentID' => 3),
    8 => array('text' => 'Item #8', 'parentID' => 5),
    9 => array('text' => 'Item #9', 'parentID' => 1),
   10 => array('text' => 'Item #10', 'parentID' => 7),
);

<?php
$addedAsChildren = array();

foreach ($menu as $id => &$menuItem) { // note that we use a reference so we don't duplicate the array
    if (!empty($menuItem['parentID'])) {
        $addedAsChildren[] = $id; // it should be removed from root, but we'll do that later

        if (!isset($menu[$menuItem['parentID']]['children'])) {
            $menu[$menuItem['parentID']]['children'] = array($id => &$menuItem); // & means we use the REFERENCE
        } else {
            $menu[$menuItem['parentID']]['children'][$id] = &$menuItem; // & means we use the REFERENCE
        }
    }

    unset($menuItem['parentID']); // we don't need parentID any more
}

unset($menuItem); // unset the reference

foreach ($addedAsChildren as $itemID) {
    unset($menu[$itemID]); // remove it from root so it's only in the ['children'] subarray
}

echo makeTree($menu);

function makeTree($menu) {
    $tree = '<ul>';

    foreach ($menu as $id => $menuItem) {
        $tree .= '<li>' . $menuItem['text'];

        if (!empty($menuItem['children'])) {
            $tree .= makeTree($menuItem['children']);
        }

        $tree .= '</li>';
    }

    return $tree . '</ul>';
}

<ul><li>Item #1<ul><li>Item #9</li></ul></li><li>Item #5<ul><li>Item #2<ul><li>Item #3<ul><li>Item #7<ul><li>Item #10</li></ul></li></ul></li><li>Item #4</li></ul></li><li>Item #6</li><li>Item #8</li></ul></li></ul>

CREATE TABLE IF NOT EXISTS `categories` (
  `id` int(11) NOT NULL AUTO_INCREMENT,
  `name` varchar(36) COLLATE utf8_unicode_ci NOT NULL,
  `parent` int(11) DEFAULT NULL,
  PRIMARY KEY (`id`)
)

function parse($tree,$parent = 0,$level = 0){
    $level++;
    foreach ($tree as $p)  {
        if ($p['parent'] != $parent) continue;
        $p['name'] = str_repeat('-',$level-1) . $p['name'];
        echo "<option name='cat' value='{$p['id']}'>{$p['name']}</option>";
        parse ($tree, $p['id'],$level);
    }
}

    $q = $link->query("SELECT * FROM `categories` ORDER BY name ASC");
    $cats = array();
    while($row = $q->fetch()){
        $cats[] = array("id"=>$row['id'],"name"=>$row['name'],"parent"=>$row['parent'],"level"=>0);
    }

parse($cats)