Show recent posts in menu?

you can use a walker like this,

class Walker_Recent_Post_Category extends Walker_Category {
    function start_el(&$output, $category, $depth, $args) { 
         extract($args); 

         $cat_name = esc_attr( $category->name); 
         $cat_name = apply_filters( 'list_cats', $cat_name, $category ); 

         $list_recent_cat_post="<ul class="show-hide">";
         $args = array( 'numberposts' => 5, 'category_name' => $category->name );
         $myposts = get_posts( $args );
         foreach( $myposts as $mypost ) :  
            $list_recent_cat_post .= '<li><a href="' . get_permalink($mypost->ID) . '">' . $mypost->post_title . '</a></li>';
         endforeach; 
         $list_recent_cat_post .= '</ul>';



         $link = '<a href="' . get_category_link( $category->term_id ) . '" '; 
         if ( $use_desc_for_title == 0 || empty($category->description) ) 
             $link .= 'title="' . sprintf(__( 'View all posts filed under %s' ), $cat_name) . '"'; 
         else 
             $link .= 'title="' . esc_attr( strip_tags( apply_filters( 'category_description', $category->description, $category ) ) ) . '"'; 
         $link .= '>'; 
         $link .= $cat_name . '</a>'; 

         if ( (! empty($feed_image)) || (! empty($feed)) ) { 
             $link .= ' '; 

             if ( empty($feed_image) ) 
                 $link .= '('; 

             $link .= '<a href="' . get_category_feed_link($category->term_id, $feed_type) . '"'; 

             if ( empty($feed) ) 
                 $alt=" alt="" . sprintf(__( 'Feed for all posts filed under %s' ), $cat_name ) . '"'; 
             else { 
                 $title=" title="" . $feed . '"'; 
                 $alt=" alt="" . $feed . '"'; 
                 $name = $feed; 
                 $link .= $title; 
             } 

             $link .= '>'; 

             if ( empty($feed_image) ) 
                 $link .= $name; 
             else 
                 $link .= "<img src="$feed_image"$alt$title" . ' />'; 
             $link .= '</a>'; 
             if ( empty($feed_image) ) 
                 $link .= ')'; 
         } 

         if ( isset($show_count) && $show_count ) 
             $link .= ' (' . intval($category->count) . ')'; 

         if ( isset($show_date) && $show_date ) { 
             $link .= ' ' . gmdate('Y-m-d', $category->last_update_timestamp); 
         } 


         $link .= $list_recent_cat_post;


         if ( isset($current_category) && $current_category ) 
             $_current_category = get_category( $current_category ); 

         if ( 'list' == $args['style'] ) { 
             $output .= "\t<li"; 
            $class="cat-item cat-item-".$category->term_id; 
             if ( isset($current_category) && $current_category && ($category->term_id == $current_category) ) 
                 $class .=  ' current-cat'; 
             elseif ( isset($_current_category) && $_current_category && ($category->term_id == $_current_category->parent) ) 
                 $class .=  ' current-cat-parent'; 
             $output .=  ' class="'.$class.'"'; 
             $output .= ">$link\n"; 
         } else { 
             $output .= "\t$link\n"; 
         } 
    }   
}

then call the walker like this,

    <ul>
       <?php wp_list_categories(
                array(
                    'show_count'=>1,
                    'title_li'  =>'',
                    'walker'    => new Walker_Recent_Post_Category()
                )
             ); ?>
    </ul>

it will display something like this,

<ul>
    <li>
        <a href="http://localhost/wordpress/category/my-category/" title="View all posts filed under my category">my category</a> (1)
        <ul class="show-hide">
            <li><a href="http://localhost/wordpress/2011/06/twetwetewrwe/">twetwetewrwe</a></li>
        </ul>
    </li>
    <li>
        <a href="http://localhost/wordpress/category/uncategorized/" title="View all posts filed under Uncategorized">Uncategorized</a> (7)
        <ul class="show-hide">
            <li><a href="http://localhost/wordpress/2011/06/5th/">5th</a></li>
            <li><a href="http://localhost/wordpress/2011/06/twtwe/">twtwe</a></li>
            <li><a href="http://localhost/wordpress/2010/08/five-ways-widget-manufacturing-can-be-bungled/">Lorem Ipsum dolor sin amet</a></li>
            <li><a href="http://localhost/wordpress/2010/08/help-me/">help-me!</a></li>
            <li><a href="http://localhost/wordpress/2010/08/hello-world-2/">Hello world!</a></li>
        </ul>
    </li>
</ul>

and some jQuery touches on the html : demo