Here's what I'm trying to do:

The user clicks on a link called "products" , then the categories are displayed...

So the only way I can accomplish this is by making a master category "products" and then throw everything in there..

This works great , but it makes my URLS unfriendly, since "products" doesn't really benefit my items in searches.

www.website.com/products/laptops/small
www.website.com/products/laptops/large
www.website.com/products/desktops/tower
www.website.com/products/desktops/mini

It will use valuable URL space to say products.. I suppose you could just have a category called "P" or something, but this seems kind of mickey-mouse... is there another way around this?

I know you can make a link to index.php?main_page=index&cPath=0
to display the categories... but it's giving me trouble in simple SEO, is there a simple way to do this that I'm overlooking?

Probably the best way to do this is to eliminate "/products/" in the url with .htaccess or maybe through a built-in feature of Simple SEO?