Using ('children=0') as you are stating only makes the toplevel AND the subcategories ALL show up in one non-indented list. It's how I have my categories listed, and I posted about that earlier in this thread, how I found the "0 or 1" functionality with children, when the WIKI says to use "true or false".
True, False, and 1 all do the same thing, indent subcategories under their toplevel category parent, and ONLY show Toplevels that have posts in them unless you use "hide_empty=0" to show ALL categories Parent with indented children. Otherwise it's just Parent that has posts in it, and indented children with posts in them.
0 shows ALL categories that have post in them, but ONLY categories that have post in them, even if their toplevel parent has NO post in it. This is the only useful way I've found to use the category listing, as I don't want people not to see a listing that does have content, and also don't want them to see a link to a page with ''Sorry, no posts matched your criteria." as the result of clicking the link.
I think it's a bug, but it's a bug that I like the "0" functionality of. Just not the "true, false, or 1" parts of it, as they all do the same thing. And since the rule in the WIKI template tags for children in wp_list_cats says this:
children - boolean - TRUE or FALSE; Whether you want to hide or show the children of the main categories (top categories only)
It makes me think it must be a bug. Sigh. I recall when going over my frustration with category listings that time that the other attributes weren't all right either. So affecting the listing how I did was a delight, and an accident, as I said earlier.
So re-reading the post above I find that in my installation "children=0" take the children and lines them up as-if a top level category, but the only the categories that have at least one post in them show up.
Using "children="1" makes the children show as sub-level under top level, indented in the list, but only the top categories that have posts in them show, if there are top categories that are empty, but their child categories have posts in them, both top and child are suppressed. You can use hide_empty here, and it gets confusing as to what's what, as I'm playing with it now on my site. Using Children=0 and hide_empty=1 and the other possibilities with both. Try playing with your site like that, having two identical listings and use the same attributes with opposite effects, or more lists than that just to see what happens all at one time to avoid confusion, as I am in right now ;)
All in all, what you are asking, I think is not possible right now. I can't get the thing to do whatever my first objective was, and so now that I found a way to make everything show up as a toplevel if it's not empty, then that's alright.
It'd be helpful if each tag had actual consistent examples of HOW to use each attribute. I get stuck sometimes, and I know that's what was helpful for me when using MT, the examples of how-to in the manual.
I am guessing that since category stuff is new to 1.2 that it'll improve over time, but isn't fully functional yet, though I haven't seen anywhere state that the "children" thing isn't working right, 'cept here, not that I've exhaustively searched for it, mind you.
I hope this isn't too overly redundant, I've come back to this multiple times as writing it while messing with the category tags. Another weary-ing thing, dumb to do to myself with all the junk I've done today with WP, but hey, when you have a Summer Cold, what more is there to do that mess with ones blog config. :)