After many months of preaching the virtues of using plain old RTF files on the Reader I've finally got around to trying out Book Designer and all I can say is "Wow!"; I'm a convert!
I'm just blown away by this program - it's wonderful. Load an RTF file into it, click the "Sony Reader" button and there's a beautifully formatted LRF file, complete with all the pictures in the RTF.
As they say in my part of the world, I'm gobsmacked

.
BD all the way for me from here on!