Ironic phrase used to describe casualties of war by friendly forces. That is, your own side shoots you, which isn't very friendly. Often preceded with the phrase "deeply regrettable military incident," when it is reported at all: the armed forces obviously find it embarassing to admit to mistakes like this.

The most famous incident in American combat occured in the Civil War, on April 30, 1863, at the Battle of Chancellorsville. The Confederate Army under the command of General Robert E. Lee, opened fire on Lt. General Stonewall Jackson, returning from a scouting mission after a particularly successful day attacking the flank of the Union Army of the Potomac. Jackson had his arm amputated and pneumonia took his life May 8.

More recently, in the Gulf War, the United States had 148 soldiers killed in battle. Official reports state that 35 of these deaths (24 percent) were attributed to "friendly fire." Of the 615 total casualties, 17 percent were due to friendly fire. Unofficial reports place the number higher. US ground units launched a total of seventeen inadvertent attacks on American and British ground forces in the region, causing casualties, as well as destroying 27 US M1-A1 Abrams tanks and Bradley Fighting Vehicles--fully 77 percent of the Army's material losses. The government attributes this disproportionate figure (the U.S. average for losses due to friendly fire had been under 2 percent, according to a study completed in 1982 by the Army Combat Studies Institute at the Army's Command and General Staff College at Fort Leavenworth, Kansas) to the absence of sustained enemy resistance and the brief length of the ground war (100 hours). After Desert Storm, the Department of Defense considered changing the rules of engagement, but decided the loss of tactical advantage was not worth it.

...if you tighten the rules of engagement to the point that you reduce fratricide, the enemy begins inflicting greater casualties on you. Waiting until you're sure in combat could mean becoming a casualty yourself. -Army Maj. Bill McKean, U.S. Atlantic Command.
The DoD is instead pursuing the application of technological advances in targeting and identification to reduce casualties from friendly fire.

In the United States Armed Forces, you are awarded the Purple Heart if wounded or killed by friendly fire.

Sources:
Garamone, Jim. "Fixes Touted to Combat Friendly Fire Casualties. " American Forces Press Service. 2 February 1999. <http://www.dtic.mil/afps/news/9902027.html> (1 September 2000)
Powell, Stewart M. "Friendly Fire." Air Force Magazine Online. December 1991 Vol. 74, No. 12. <http://www.afa.org/magazine/perspectives/desert_storm/1291fire.html> (1 September 2000)