I think you are trying to convert the chm version "Shi Ji with three commenters", am I right? If you have nook color why not try directly opening it in a good chm viewer app? I tried using Calibre to convert it to mobi. Although the conversion was successful, it was too slow to open it in Kindle (minutes of waiting). So I downloaded a mobi version without commentations from shucang, and it reads just fine.
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