Sorry that I answer didn't take inheritance into account.  Is there a maximum 
number of levels of subcategories, or will it always be an unknown?  I have 
done looping with tSQL in the past using cursors, and it really is a pain.  

You could use a UDF (User Defined Function) and return a table variable.  Here 
is a link for an example of returning a table variable:  
http://sqlt.tripod.com/recursivity.htm

You could probably modify this example to return a bit value if the category or 
any parent has a product assigned.  In theory if you write the function 
correctly you could write a single update statement that sets the hasproducts 
column equal to the funtion value passing in the category as a parameter.

Something like
UPDATE categories set hasprodutcs = fnHasProduct(category)

where fnHasProduct id the name of your UDF and accepts the category as a 
parameter.

The real work would be in writing your UDF.

You would want you to thoroughly test your UDF, but it could provide you with a 
powerful and simple execution that even incorporates a little OOP using tSQL. 

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