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.xhtml is my nitpicky preference -- it doesn't really matter, but it looks nicer and more "correct" to me.
If you make a proper EPUB, you can use it as a source for further conversions -- preferable to redoing all that work for MOBI as well. There is no good reason IMHO to consider handcrafted XHTML to be technically superior to a handcrafted EPUB. Both are (equally) better than uncleaned Word exports.
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