What @Tim Said.
If you decide that you must use folders for whatever reason, I would suggest not going more than 1 level deep. Usually, the reasoning to use folders is to clearly define the areas of your site. So for instance if your site sells products, has a blog and has users then you might want to go with a structure like this:
That means your product page, using Tim's example, would be:
Again, I want to stress, I would only use this if you have different sections. Also, if the products are the most important part then this structure would be even better:
That way products are as close to the top domain as possible and short for users but there is also some separation for your blog and account administration.
Google's guideline is each folder deeper you go, Google sees the content as less important and reduces is SEO value some. So keeping thing close to the top of the domain is good for users and good for Google.
I looked into it a bit more and I could not find Google specifically stating that going many directories deep would cause you to lose PageRank by level but I did find in Google's Search Engine Optimization Starter Guide document on page 8 this statement:
- having deep nesting of subdirectories like ".../dir1/dir2/dir3/dir4/dir5/dir6/ page.html"
- using directory names that have no relation to the content in them
This document from Google might also be helpful, http://www.google.com/support/webmasters/bin/answer.py?answer=76329.