Have you tried setting the internal pretty URLs in config.php?...
#------------
#URL Settings
#------------
#Show mod_rewrite URLs in the menu? You must enable 'use_hierarchy' for this to work for modules
$config['assume_mod_rewrite'] = false;
#Extension to use if you're using mod_rewrite for pretty URLs.
$config['page_extension'] = ' ';
#If you don't use mod_rewrite, then would you like to use the built-in
#pretty url mechanism? This will not work with IIS and the {metadata} tag
#should be in all of your templates before enabling.
$config['internal_pretty_urls'] = true;
#If you're using the internal pretty url mechanism or mod_rewrite, would you like to
#show urls in their hierarchy? (ex.
http://www.mysite.com/parent/parent/childpage)
$config['use_hierarchy'] = true;
this one is for the modules like news
#If using none of the above options, what should we be using for the query string
#variable? (ex.
http://www.mysite.com/index.php?page=somecontent)
$config['query_var'] = '.html';
Solved the XHTML validation process by playing around with the config.php settings as suggested.
