What Is Search Engine Optimization (SEO)
Search engines like GOOGLE, YAHOO, ALTAVISTA, MSN, and others, are robots programmed to read internet pages, index them, and rank them according to some predetermined rules (algorithm).
The whole World Wide Web (www) and internet are like one BIG book, where each website is a chapter, and each web-page is a page in that chapter. At the end of this book there is an index. For example, next to the term 'SEO' in the index, there will be a list of all pages that contain term 'SEO'. In traditional books where pages are listed in sequential order, in index they will also be listed in sequential order (e.g. SEO - 133, 175, 742). Because the internet is not sequential book, but each page is determined by its URL, relevant 'SEO' pages in the index are not sorted sequentially, but are ordered according to certain rank assigned to them for the given term (in this example 'SEO').
This rank is so important that depending on it, your page may or may not appear when someone searches for relevant terms on Google. Algorithm that determines this rank is complex, and many factors are taken into account. Frequency of terms occurrence is only 1 of about hundred different factors. What other pages link to your page is another. What words those pages use in links to your pages is yet another. And so on... Because of the complexity, and importance of this algorithm, optimizing pages for search engines became a specialized field, even an industry that is now full of 'consultants', 'experts', 'specialists', 'engineers', and similar titles. It is called Search Engine Optimization (SEO).
Note that this rank described above is not the same as Google PageRank (PR), which determines a popularity and importance of a page, and depends primarily on the number of other pages linking to it as well as importance (PR) of those pages. Yes, you are right, it is a circular definition - PR depends on other PR's which also depend on this PR, and so on... (chicken, or egg, or chicken, or ...) That's why there is much more to it than this simple description. Anyhow, to get little better understanding of it, see experiment and reference links on the right.