trouble with getting pretty permalinks – please advise

hello,

i’m trying to get pretty permalinks with a custom structure as follows:
/%category%/%postname%/

it works, however, the navigation on my website is based on categories, and my index.php includes some code which filters out posts by category and displays them as icons:

<div id="fcontent">
	<?php

	$thefront = 'frontpage';

	if($_GET[cat]){
	$thefront = $_GET[cat];
	}

$cat_id = $thefront;
$categories = get_categories();
foreach( $categories as $category ) {
	if( $category->term_id == $cat_id ) {
		$cat_name = $category->name;
		break;
	}
}

query_posts("category_name=$cat_name&showposts=35");
	if (have_posts()) : while (have_posts()) : the_post();
		$new_excerpt = wpautop(clean_pre($post->post_excerpt));
		$newp = '<p><a href="' . $post->guid . '" title="' . $post->post_title . '" rel="bookmark">';
		$new_excerpt = str_replace('<p>',$newp, $new_excerpt);
		$new_excerpt = str_replace('</p>','</a></p>', $new_excerpt);
		$sfront[] = array('link' => $post->guid, 'title' => $post->post_title, 'id' => $post->ID,'excerpt' => $new_excerpt);
	endwhile; else: ?>
		<p><?php _e('Sorry, no results found.'); ?></p>
	<?php endif;
	shuffle($sfront);
	array_splice($sfront, 20); $p=0;
	 foreach($sfront as $sp) {
	 	$sid = $sp['id'];
	 ?>
		<? if ($p == 3) { echo '<div style="clear:both;padding-top:10px;"></div>'; $p=1;} else { $p++; };  ?>

		<div class="fpost" id="post-<?=$sid;?>">

			<div class="storytitlefront"><a href="<?=$sp['link'];?>" title="<?=$sp['title'];?>" rel="bookmark"><?=$sp['title'];?></a></div>
			<div class="storycontent">
				<?
					echo $sp['excerpt'];
				?>
			</div>
		</div>
<? }; ?>
	<?php //posts_nav_link(' — ', __('&laquo; Previous Page'), __('Next Page &raquo;')); ?>
	<?php get_footer(); ?>

my index.php looks like this:

<?php get_header(); ?>
<div id="content">
 <?php if($_GET[cat]){
 		include('test.php');
	}else{
?>
	<?php if (have_posts()) : while (have_posts()) : the_post(); ?>
		<div class="post" id="post-<?php the_ID(); ?>">
			<div class="storytitle"><a href="<?php the_permalink() ?>" rel="bookmark" title="<?php the_title(); ?> / <?php the_time('Y') ?>"><?php the_title(); ?></a></div>
			<div class="storycontent">
				<?php the_content(__('(more...)')); ?>
				<?php edit_post_link('Edit'); ?>

			</div>
		</div>
	<?php endwhile; else: ?>
		<p><?php _e('Sorry, no results found.'); ?></p>
	<?php endif;
	 ?>

	<?php posts_nav_link(' — ', __('&laquo; Previous Page'), __('Next Page &raquo;')); ?>
	<?php get_footer(); ?>
<? }?>

so, when custom permalinks are set, the feature of filtering posts by categories and displaying them as icons is gone, and instead, whenever i choose a category, i get a single page which includes all the posts in that cateogry displayed with their full content rather as icons.

how should i fix that?

will appreciate some help!

regards,
spk.