Thanks djgreedo for the tips. I followed your very clear instruction and am sure I got it all.
Tried to convert the test file again and now Word is stuck.

Don't worry, I'll play around a bit and then throw the puter out. Has to be the hardware
Update: Euraka! I've done it.

I have created my first ebooks. Now a tiny question - I have separated the cover from the book. Is there a recommended format to add the cover? Currently a wordfile but only comes out as a '?' on the created file.