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I also published a book on Smashwords and was dismayed to find the same problem. However, in every other ePub-reading software I've tried, my book has displayed fine, so I think it's a problem restricted to Kobo's eReader at this point (hopefully fixed in firmware update). You could also try e-mailing Mark Coker at Smashwords, he's pretty good about responding to e-mails.
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