Looking at the source of the book I'm pretty sure the problem is with MS Word, which has added in a whole bunch of stuff - for example a footnote produces this:
ftn41' href="#_ftn41" name="_ftnref41" title=""><span
class=MsoFootnoteReference><span style='mso-special-character:footnote'><![if !supportFootnotes]><![endif]></span></span></a><span
I would guess this is what is causing problems for Book Designer.
I'd suggest saving it as plain text and converting from that - though unfortunately you could lose the footnotes. My advice to anyone wanting to produce a decent quality html file for conversion is get a decent text editor program and don't go anywhere near any MS product other than NotePad