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I do not have any issues with html files showing images. The way I load it into my Gen3 is to have the the html file saved to a folder on my pc along with the folder with images.
I then open mobi desktop and drag and drop the html file only to either the list of book or the list of content on my device. The Mobi Desktop application then converts the file to a MobiPocket file.
Once transferred to my reader I can browse to the folders in my device and copy the file where I like within any of the book folders or sub folders.
If you want to change the content or the way it displays, simple edit the html file before converting.
I quite often save web pages to my PC and then load them directly via Mobi Desktop.
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