As far as web pages are concerned XHTML allows your users to more easily write programs that monkey with the page, extracting the information that is relevant to them. Away from the web it allows you to combine mark up languages. You pay, however, because XHTML is incompatible with HTML and HTML browsers.
This can become a big problem because behind the scenes your web server is telling browsers what type of document is being sent. And if the browser is expecting HTML and it gets XHTML things can get ugly. Oh, and MSIE doesn't understand XHTML as a type of HTML. It understands it as raw XML which is not an incorrect thing to do.
If you must use XHTML then you must follow the XHTML HTML Compatibility Guidelines. But if you are a Dreamweaver user, those guidelines will make no sense whatsoever so do use HTML 4.01.