1.)  Click the [Appearance] link and change your settings for "expert editing 
commands" from Hide to Show or Compact.
2.)  Go to the category in which you want to make a subcategory
3.)  Click the link near the top that says [New Subcategory of "PARENT CATEGORY NAME..."] 
where "PARENT CATEGORY NAME" is the category you are currently in.
4.)  Type your new category name and click "Submit Changes"