Here are examples
Demonstrator Archives - Gallery
There are no photos that show because there are none to show. The featured photo blocks can show photos for children of parent categories but its not going to continually scan down and do children of children of parents etc.
Now at the url above if you set as I noted in Admin => Show Photo Options the option to display features on the showphoto and showgallery pages you will get a photo block that contains photos from that cat and its children.
If you do not want to use that new style sidebar category display and use the old style forum style cat list you can set that on in index options in admin. Your only going to see category avatars on index if you use the forum style display.