I've done some testing on that front, and here's what I've found:
If there are no posts in a category, but the category has sub-cats with posts, and you're listing them as nested links (by setting the last flag to true, per TechGnome's suggestion), AND you're supressing empty categories...the sub-cats won't show up. I tried this with a single post to a sub-category, but no posts to the parent category. I get "no categories" and nothing else.
If I don't supress empty categories, then it lists EVERY category and sub-category, regardless of whether there are posts or not, and EVERY category and sub-category is a link.
If I go back and add the parent category to the post (and supress empty cats), then I get the category and sub-category...but again, the parent category is a link.
This also has the undesirable effect of listing both cat and sub-cat in the "Filed Under:" section.
To see what I mean...I have set up a new site with only 1 post, for testing. Once I get it working the way I want I will add style (and more content...)
Take a look here: http://www.cantboilwater.com/
Notice the single post has the following categorization:
food type: pasta
meal type: dinner
I'd like the "filed under:" to only show the sub-cats. Ex:
Filed Under: easy, pasta, dinner, italian
Also, I'd like ONLY the sub-cats to be links...not the categories.
This is how I always envisioned sub-categories working...otherwise they're just additional categories. Nothing "sub" about them.