As I stated in my first post about why Submarines should not be in Civ3, which I'm sure you saw, I mentioned the AI as the third problem as to submarine implementation.
The simple fact is that the AI knows all and sees all. It can see the whole map and know the location of every unit on it (that's how it knows to go for undefended cities first). So far as I know, this does not get turned off. This is why submarine detection bonuses only work in MP. Wait...there's no MP in Civ3 yet. Drat. Don't build subs until then, if ever.
A hardcoded FRIGATES CANNOT ATTACK SUBMARINES would be nice, but unlikely to be a high priority.
-Sev
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