Ok, I just installed Vista using ChrisI's steps mentioned above & tested it. Everything works perfectly!
Here's exactly what I did (with Word 2007 already installed)...
1. Download and install the Microsoft DHTML Editing Control.
2. Download and install BookDesigner Installer & BookDesigner Update from
http://www.bookdesigner.org
3. Browse to C:\Program Files\ and right-click on the Book Designer 4.0 folder. Select Properties. Go to the Security tab. Select Edit, select your user-id. Grant yourself full access to the directory (check the boxes under allow).
4. Create the folder "Sony Reader", and "LastFile" in the Book Designer 4.0 folder.
5. Open a Command Prompt, as Administrator. (Right-click on the menu item and select run as administrator.) Go to the Book Designer 4.0 directory, and run the following command: regsvr32 GflAx.dll. This dll was copied to the BD by the update, and needs to be registered to get graphics (such as browse for a cover page) to work properly.