Update: I hunted down the problem to the category cache. The problem was due to the category cache being stuck. It was never updating, anyway I cleared out the cache by setting it off and then re-enabled it. Maybe it was corrupted -- Anyway it now works as it is suppose to and the category cache is updating on the set interval.
Now I am on to the on-the-fly watermarking. I am using the watermarking script to make it a bit more difficult for saving photos. I am guessing you are putting a clear filter on the top... But just started on this... Haven't looked at the code as-of-yet.
Thanks for the previous reply.
PS: The permissions work nicely in v8.