I'm having the exact same problem... nothing I'm converting is working on the Kindle (in either Mobipocket or Amazon Kindle format). I've used MobiPocket, HTML and PDF files so far. Most have just been a couple of megs.
I just tried this.. which is a text file I converted to mobipocket. But i get the message "the selected item could not be opened."
Love the idea of the program... would be nice if it could organize your stuff as well in an iTunes sort of way. Also, editing the metadata would be a great addition. These two changes would be the difference in me buying it or not.
That and, you know, working on my Kindle.