Category Widget – Problem with Parent Slug in Dropdown mode

Fresh WP 3.5 clean installation (not upgrade) with no plug-ins ever installed, stock twenty twelve theme. This is an empty test site I just set up to troubleshoot a problem I am having with ALL WP installations on my server. Only setting change is enabling permalinks so I can use slugs.

Here is the issue:

When using the category widget in dropdown mode, if I select a category that has a subcategory, the URL of the linked page is the ID, /?cat=xx, rather than the category slug. A bottom level child category or any category without a child, work just fine – I get the slug URL.

If I remove a sub-cat from the parent cat, the parent cat slug works again. Soon as I set a parent cat for a category, I get the /?cat=xx URL for that parent category again.

The category widget works fine for ALL category types when in list mode. (No dropdown option selected in widget.)

After spending a good deal of time trying to figure this out on my live sites (with plugins, custom themes, etc.) I set up this test site and am still getting this issue. Again, 100% plain, unmodified 3.5 installation on a fresh cpanel account. It’s not a conflict with a plugin or theme.

I have only found a couple posts with similar problems and there are no real solutions mentioned, so I’m guessing this is NOT a known problem or issue. Since this is a 100% unmodified installation of WP, can I assume the problem is on my web host’s end?