Include full category hierarchy in URL or only the "leaf"?

I'd go for the first one as well. Besides being good for SEO it technically is good for usability as it helps to clearly define what the page is about (for those who actually have any clue what they are looking at that is).

I wouldn't worry about longish URLs as not only are they very common nowadays, but most people are clicking on links to get to their content as opposed to typing it in. Most people find content from either doing searches or navigating their way into a site. And when they do type in a URL is usually just the domain name. Rarely do you see a user enter a URL with subdirectories or query strings. They usually find those deeper pages by search or hitting the site homepage and then navigating deeper.

Ditto what John Conde said.

Also, with the second method what if you have categories with the same name as a sub or sub-sub category or if you have a sub category with the same name as a sub-sub category. It will cause you call kinds of issues.

I would only suggest the second method if you have extremely short categories and few of them. Even with short category names people are very unlikely to type them in.