Using the latest version of the Top Level Categories plugin from http://fortes.com/2007/06/20/top-level-categories-plugin-10/ this nearly seems to work!
Most of the blog works as you can see on my install of it at http://techvideoblog.com other than navigating to 'Previous Entries' or using the wp-pagenavi page navigation plugin that I put in the header.
The blog doesn't seem to know it is on the 4th page in terms of displaying the 'Previous Entries' 'Next Entries' and displaying the wp-pagenavi links correctly. This seems to be the only problem with the Top Level Categories 1.0 plugin.
This part of the blog works:
(as you can see 'Previous Entries' and 'Next Entries' works because it is in the ?year=2006& but that type of URL is only done manually.
This topic has been covered in http://wordpress.org/extend/ideas/topic.php?id=359 but still doesn't seem to be resolved. I tried the suggestion at http://bloggerholic.com/wordpress/how-to-remove-category-base-from-permalinks-45.htm and it doesn't seem to work on my installation of WordPress 2.2.