Enable SEO Urls in your store
In your store's Admin area, go to the System > Settings > System section.
You can assign SEO Url to the following items:
Numbers are added to SEO names
The number is added to a SEO name if the same name is already in use for another object (product, category, etc).
Use SEO URLs: To use SEO URL's Apache module mod-rewrite must be installed and you need to rename the htaccess.txt file to .htaccess
Search Engine Friendly URLs allows you to activate categories and product's SEO Keyword setting. For each product and category you can assign seo keyword visible in url. This will better describe a product's page to visitors and search engines.
mod_rewrite is something that is installed on your server by your web host. You need to ask your host (or look in their help guide) to find out if you have it.
Note: If you access store with sub-folder like http://www.mydomain/subfolder make sure to change RewriteBase / to RewriteBase /subfolder/ in the .htaccess file.