The %1 is captured from the original query string, and the final ? means that you now get rid of the query string. In real life it will usually be a little more complicated, but that's the basic process.
Example: user asks for www.example.com/directory/morestuff/index.php?model=volvo
They get bounced over to www.example.com/cars/volvo
Part 2. Rewrite You get an incoming request for a short pretty URL-- either from a new arrival or from someone who was redirected in Part 1. The server can't tell the difference.
This time around, you're capturing part of the request and changing it into a query string.
Example: user asks for www.example.com/cars/volvo
They may think that's what they're getting-- it's what the browser's address bar says-- but behind the scenes the page content is really coming from www.example.com/directory/morestuff/index.php?model=$1
Now you see why Part 1 had to look at THE_REQUEST. It's for insurance. If something happens later on, your long complicated URL might pass through mod_rewrite again. If it does, you need to be sure it doesn't get re-redirected. Otherwise there will be an infinite loop.
Now wait a minute! Does this mean that if someone starts out asking for "longcomplicatedURL", they go through this whole rigamarole and then they end up right back where they started?
Yup. But they don't know it. They only know what the browser's address bar tells them. Even robots-- yes, even google-- can't tell that they're being rewritten.
The Redirect part of the package-- Part 1-- is not technically necessary. The Rewrite-- Part 2-- will function without it. But redirecting everyone to the same URL means that everyone is now on the same page ... and it avoids nasty things like Duplicate Content.
But you're not done yet.
Part 0. Before you do anything with Part 1 and Part 2, go over your current site carefully. Make sure that your own links point only to the short pretty URL. Requests for the long complicated URL should come only from outside-- from people with outdated bookmarks, or old links from other sites. Your own site will use only the pretty URLs.