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Make sure that the Calibre path is correct: go to your 'program files' folder and see if you have a folder called 'Calibre' or one called 'Calibre2'.
Then in the box that pops up for you to create an ebook, go to the Calibre tab and make sure the path is correct (i.e. it is either 'Calibre' or 'Calibre2' based on the Calibre folder in 'Program Files'.
I've also noticed that the template doesn't work properly if the wrong settings are selected in Word's web options (I think the HTML it makes is not compatible with Calibre if the wrong settings are used.
My web options (Word 2010, should be identical in Word 2007, similar in Word 2003): Browser and Files tabs: everything ticked; Encoding tab: Unicode UTF8; Fonts tab: Character Set: multilingual/unicode/other script.
Also, make sure you're not using a really old Calibre as I believe the part of Calibre that converts the file has actually changed names since the older versions (now it is ebook-convert.exe whereas I think there used to be several, e.g. html2lrf.exe, etc.)
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