As mentioned in my last blog, Joomla uses dynamic URLs. These URLs contain characters for passing information to the current web page. These URLs can be long and complicated and may not be indexed by many of the major search engines. The following URL is an example of a dynamic URL:

http://www.lab11.com/index.php?option=com_content&task=view&id=12&Itemid=32

A search engine friendly (SEF) URL is a URL that is more readable and is lacking the characters that designate it as a dynamic URL.
Joomla has a build in SEF tool that automatically changes your URLs to SEF URLs. Using this tool the URL above would be changed to:

http://www.lab11.com/blogs/12-enhancing-the-reader-experience

This URL still passing information to the current web page, it just does it in a more 'friendly' way.

http://www.lab11.com/blogs/12-enhancing-the-reader-experience

After the base URL of the site (http://www.lab11.com) is the alias of the menu item that is assigned to the Itemid. As I mention in by last blog, Itemids are assigned to menu items and designate what module and and templates are used on the specific web page. If your menu is a child menu, then you need to list all the menus in order from parent to child (/parent/child...).

http://www.lab11.com/blogs/12-enhancing-the-reader-experience

Next in the URL is the id of the content item followed by a hyphon and then  the alias of the content item. The alias of the content item is not required, but is a good idea to have since it helps increase search engine rankings.

Thats all there is too it.

Here are a few examples of sites using search engine friendly URLs:
http://www.globaltennisnetwork.com
http://smithstix.com