Managing lots of categories

Hi,

I have a WP site where I have lots of categories, more than 2 hundred, so there are about 12 top categories and rest are sub-categories to them.

Now what is best way to display them , definitely can’t go on listing all categories as dropdown, will be bad in many ways.. like page load as well as seo.

I have two solutions in mind :
1. Go for Ajax based menu ie. load only top level menu, rest submenu is loaded when user hover on it. By this method, I am not sure how search engine will index links as certain menu item can be access only through menu, no alternative way.

2. In this way will use sidebar for menu, again load all top level item of menu always and also show parent and children of current item ie. if an item is in category A , then show category A in sidebar menu as well its all submenu. So only limited number of menu loaded.

So kindly give your suggestions..