What has happened is basically this...
Somehow, you have managed to start adding products (in the product management screen of admin) BEFORE you created categories.
The only way I know this can happen, is if Easy Populate is used to populate a new store, and no categories are specified in the spreadsheet.
So unfortunately, the only safe way to remedy this problem is to REMOVE all your products from "top" category, so that it is completely empty.
Only then will you be able to create categories and (if desired) sub-categories.
Changing MODEL to Catalog#
(I would be careful of using special characters like #).
As I recall, there are about 17 instances of define statements in the language files that relate to the define "Model".
remember... you ONLY need to change define statements - nothing else.
It takes about 20 minutes to do all these edits - and if you don't use things like the music product module, then you can ignore the defines in these language files...