PrettyUrls use the Apache webserver's mod_rewrite module to handle URL rewriting to convert browser references such as
http://www.example.com/blogs/1
to web server references such as
http://www.example.com/blogs/index.php?post_id=1

So far Blogs, Wiki, Fisheye and Users have had code added to handle the checkbox for PrettyUrls in Admin -> Features

mod_rewrite comes as part of apache by default and has to be enabled in your httpd.conf file:
{code()}
<directory />
Options FollowSymLinks
AllowOverride None

{code}
goes to
{code()}
<directory />
Options FollowSymLinks
AllowOverride All

{code}

this should be done for the / dir and your html dir such as /var/www/