Switch on the “advanced view” in your configuration screen and then look for the configuration setting “use without .htaccess” (depending on the version you run I thin kits on page two) and chang it to use with .htaccess.

Then make sure thet your .htaccess file contains the right code (its in included in the documentation of sh404SEF in the configuration panel)

This option only works on Apache based webhosting accounts wiht mod_rewirte enabled (about 90% of the hosting will be fine).
On a windows based hosting, you cannot get rid of hte index.php that easy.