Hi,
Basically the URL structure for articles is:
menu-title/category/subcategory/article-title
You can remove the menu title by disabling "Show Menu Title" option in Manage Extensions -> Content -> Common tab.
You can control the categories and subcategories on the Extension tab.
The "Use Title or Alias" configuration has no effect on the structure of the link, it only lets you choose if you want to use titles or aliases in your URLs.
Of course after making any change in these settings, you need to delete or update the already created SEF URLs using Manage SEF URLs page and clear Joomla and JoomSEF caches.
UPDATE:
The uncategorized articles are currently a problem in Joomla 1.7, because the "Uncategorised" is just another category, you can for example rename it to anything else. So currently if you want to have categories in your URLs for categorized articles, but you don't want the word "uncategorised" for the uncategorized ones, you need to use the "Exclude categories from article links" option on the Extension tab and specify the uncategorised title there.
But we're working on a better solution.
