WordPress isn't very SEOd on its own, but there are lots of plugins to help out in this area. Optimize your theme, use these plugins, and you'll be all set.

These are some of my favorites:

AskApache Google 404 - http://www.askapache.com/seo/404-google-wordpress-plugin.html
Adds Intelligent SEO Ajax-powered Google Search to 404 pages. This allows readers who end up on 404 pages of your website to search Google through your site. It is supposed to help with SEO.

Dagon Design Sitemap Generator - http://www.dagondesign.com/articles/sitemap-generator-plugin-for-wordpress/
Generates a fully customizable sitemap. Helps get all pages on your site indexed without needing to manually update a sitemap.

Google XMP Sitemaps - http://www.arnebrachhold.de/redir/sitemap-home/
This plugin will generate a sitemaps.org compatible sitemap of your WordPress blog which is supported by Ask.com, Google, MSN Search and Yahoo.

Headspace2 - http://urbangiraffe.com/plugins/headspace2/
Meta-data manager on steroids, allowing complete control over all SEO needs such as keywords/tags, titles, description, stylesheets, and many other goodies. Slightly confusing at first, but very nice.

SEO Slugs - http://www.vretoolbar.com/news/seo-slugs-wordpress-plugin
Removes common words like ‘a’, ‘the’, ‘in’ from post slugs to improve SEO.

SEO_Wordpress - http://www.utheguru.com/seo_wordpress-wordpress-seo-plugin
SEO_Wordpress builds upon an earlier plugin, dupPrevent. This plugin is designed to reduce the incidence of ’supplemental results’ inherent to Wordpress installs.

WordPress Related Posts - http://fairyfish.net/2007/09/12/wordpress-23-related-posts-plugin/
Generate a related posts list via tags of WordPress. Good for SEO because internal linking is important, and this helps you out by automatically adding a list on every post. If there are no related posts, it outputs a list of random posts.

Yep, that's a great one, too.

I tried that before, but ended up switching to Headspace2. They are very similar,  but I liked the options of Headspace2 a bit better than All in One SEO. As for which to go with, it's really a personal preference and I recommend to others to try both before deciding. Headspace2 can import all All in One SEO settings if you decide to switch, which makes it easy!