This is a little known feature that I believe should be documented well. If you are using IIS or do not have the mod_rewrite ability, it is possible to still have serach engine friendly URIs in WordPress. If someone was dissuaded from using WP because of this, be dissed no more! Here are the instruction from the admin page of WordPress 1.2 Mingus:
In general for this you must use mod_rewrite, however if you put a filename at the beginning WordPress will attempt to use that to pass the arguments, for example:
If you use this option you can ignore the mod_rewrite rules.