<category /> label can contain term, scheme, and label attributes. The first is required, specifying the categor(ies) that the post belongs to. The latter two are optional. The MO feed does not include the label attribute, which according to the RFC is what tells the user agents what to display in terms of categories. (The term attribute is only used for identification.)
@Dror: do you know any feeds which are in Atom (not RSS) and which has categories displayed in GoogleReader? Can you confirm that the lack of the label attribute is what is causing the non-display?