How are the styles of 'styles' and 'format' drop down menus controlled - is this from a .css stylesheet attached to the .html file being edited?
Yes, the styles of the editor toolbar are controlled with a stylesheet. You are free to modify it as you desire.

Is the output from snippetmaster valid XHTML (assuming the original file being edited was valid code!)
Yes, the editor output is fully xhtml valid.

Is there any way to prevent two users editing the same file at the same time?
No, but if person A has file1.html open for editing and then person B opens the same file and saves it... then person A will receive a message to let them know that the file was changed by someone else during the time they were editing.
Thanks for your help.
Let me know if you have any more questions.
Cheers!