OK a step by step (roughly) of what I did in order to sucessfully get joomla, virtuemart and openSef working.

Downloaded and setup:
joomla version 1.0.10
Virtuemart version 1.0.6
(these can be done with the install read me)

Dowloaded OpenSEF 2.0.0-RC5_SP2
Installed this component.

In dreamweaver I opened the htaccess.txt file
put # characters (to comment out)

Code:

#RewriteCond %{REQUEST_FILENAME} !-f
#RewriteCond %{REQUEST_FILENAME} !-d
##RewriteCond %{REQUEST_URI} ^(/component/option,com) [NC,OR] 		##optional - see notes##
#RewriteCond %{REQUEST_URI} (/|\.htm|\.php|\.html|/[^.]*)$  [NC]
#RewriteRule ^(content/|component/) index.php


At the bottom of the htaccess file I uncommented the code under ########## Begin - 3rd Party SEF Section
Code:

RewriteCond %{REQUEST_URI} ^(/component/option,com) [NC,OR] 		##optional - see notes##
RewriteCond %{REQUEST_URI} (/|\.htm|\.php|\.html|/[^.]*)$  [NC]
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule (.*) index.php


I saved this file as .htaccess in the same area at the htaccess.txt file (the . is very important)

In the administrator web page on my site
navigate to: site > global configuration
under the SEO tab click Yes for Search Engine Friendly URLs.
Click the Save button

Navigate to Components > OpenSEF > Configuration
OpenSEF Enabled needs to be Yes,

So far urls should work for your Home, News, Blog etc...
The tricky part now is setting it up for Virtuemart.

Still under the administrator website navigate to
Menu > main menu

Click the New button icon
choose Component
Name your menu item
Choose "VirtueMart"
Click Save

Navigate to Components > OpenSEF > Configuration
Click on Components
Where it says Virtuemart click the Use alias Check box and type in an alias (most people on this blog have been using "shop")
Click Save

Downolad a sef_ext.php file (the file I have attached to this post was from a previous post)
In your folders of your website
add the sef_ext.php file into the "components/com_virtuemart/" directory (com_virtuemart folder is inside the components folder)

*note: This sef_ext.php still appends the unique id.

If you wish to have categories as links to your menu (instead of the virtuemart component in your main menu)

Do a google search for "virtuemart menu addon"
It might still be at this link
http://virtuemart.net/index.php?option=com_content&task=view&id=157

You can then install these files and create a menu link from the categories you have created.

Hope this helps