I have tried method 2 a number of times. It works well but the irony is, pages using this method are not indexed by search engines.
Search Engine Friendly? hmmm
I have checked a couple on unimportant sites which have been live for over a year and only the static pages ending with .php are indexed, the dynamic stuff is not.
Also Google Webmaster Tools reports each dynamic page as a 404 error.
And most auto sitmap generating tools also report these pages as errrors and usually fail to include them in their output.
Looks like I'm gonna have to try mod-rewrite.