Is there a way to use regular categories with custom post types?

Is there a way to use regular categories with custom post types? It seems like there is better functionality and options with regular categories (such as permalink options, etc.).

No problem, the categories and tags are also registered as taxonomies that you can pass to the taxonomies argument when you call register_post_type(). Categories are category and tags are post_tag. You can also do this later with register_taxonomy_for_object_type():

add_action( 'init', 'wpse6098_init', 100 ); // 100 so the post type has been registered
function wpse6098_init()
{
    register_taxonomy_for_object_type( 'category', 'your_custom_post_type' );
}