You don't need to spend a penny (er, if you see what I mean
Go to MobiPocket's developer site here
and download MobiPocket Creator. It's a free tool for creating MobiPocket books, and it's what I've used to create the Mobi books I've uploaded here, many of which you'll see have illustrations, etc.
Works beautifully and it's all free.
All you have to do is create a project and add all your HTML files to it. The "cross-file" hyperlinks will all be resolved and you'll end up with a MobiPocket book which the iLiad can read.