ok, to answer my own questions, if you use the "Add Moderator" drop down box next to each category that user will be given the ability edit/delete all images under that category.
im not sure if that user can moderate any sub-categories. i didnt check it out because i dont need that function, yet. maybe brian or someone else here would know that answer.
it would be nice if the category moderator had the ability to add sub-categories under the category they are moderator for. as far as i could see, this is not an option though i would love if someone proved me wrong.