Step 3: ... Pick a Format, Make it a Fixed Layout...
How you want to distribute your book will play a large part in what format you choose. If you primarily want to distribute on Kindle, your format will be KF8/AZW and you'll probably use Amazon's authoring tools. If you want to distribute with Apple, your format will be iBook or EPUB. Think about how you want to distribute your book and read up on the different formats. Also, see if there are ways to convert between formats to allow you to easily migrate your book to other platforms.
I decided to first publish with Apple's iBookstore. I did this for a number of reasons: I have an iPad to test on; I already have an Apple account, so I know how their administration works; creating a fixed page layout is very simple with iBooks Author; Author exports to PDF so I could easily sell my ebook on sites that support selling PDFs. I'm not saying this is the best way, just the way that I chose.
In general, eBooks are minimally formatted to allow for different screen and font sizes. That means the number of pages in an eBook are not fixed, it depends on your screen size and selected font. This is not conducive to illustrated books where text, page and illustrations are linked. You need static pages, just as if it were a real book.
Each format supports fixed layouts in their own way. Your next step is figuring out how to fix the layout with your chosen format. As I said, with iBook's Author it's very easy, dragging and dropping your text and images. With EPUB, I believe you need to create (or find) a fixed layout EPUB template. While PDFs are fixed layout by default, it's generally not easy to convert to other formats from PDF, while everything converts to PDF. If you pick another format to start with, usually you can create a PDF version very easily.
Some common formats are:
EPUB - most common ebook format (except for Kindle!)
KF8/AZW - Kindle formats
iBook - Apple format
PDF - supported by virtually all readers.
While PDFs are supported by every reader, they are not very common for commercially sold ebooks. I believe the reason for this is the ability to re-flow text in a PDF is either not supported, or not well supported. Since we are making a fixed layout book, PDF becomes a more viable format.