Efficiency just means how much of the available sugars, most of them fermentable, made it out of your grain and into the boil kettle from mash and mash out. Usually there are a lot of factors that play into your mash efficiency on your system, including mash temp, duration, grain crush, water volume, pH, and sparge/mash out process. It may take a couple of all-grains to figure out your system, so it's good to estimate you'll get 68% efficiency when calculating your grain bill.
+1 on Ray Daniels' book. I use nothing but that. Not only does he do a great job describing ingredients and styles, but also provides simple equations and properties of malts and hops to create your own recipes. Beersmith would certainly help to not have to calculate everything out by hand though (which is easy btw).