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Use the "Palm" option. Set the format to "MobiPocket" and the device to anything except "Palm B&W". All the other three device options are the same, and give you colour pictures in the resulting file, which is nice if you're using the desktop reader.
One thing to note with Mobi books is that you need to insert MANUAL pagebreaks at the start of chapters - you don't get them automatically as you do with the Sony Reader option.
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