Thank you, Oleg, for your response, and thanks, Matt, for jumping in.
The response was definitely very informative, but I'm still on the fence about this issue because, while Oleg confirmed what I had thought, that #2 would be the better choice, I now want to ensure that all the products on pages past page 1 will be crawlable by search engines. Any scenarios that you can think of in which search engines would not be able to read subsequent pages? Assuming that this is done using Ajax should we be okay?
(Please bear with me, my specialty is link building and content, not the technical stuff 