Having a bit of trouble with child categories. I'm using them on a Custom Post Type, if that's relevant.
Correct setup of categories: http://cl.ly/AxC3
Just before clicking the button to add a new category to a parent category: http://cl.ly/AwtP
Just after, doesn't add to parent: http://cl.ly/AxQk
If you give both the new category and the parent category, it removes all the other children: http://cl.ly/Awy0
It's not just cosmetic either, with both the parent and child selected, it outputs them via the_category() as both top-level categories: http://cl.ly/AwRS