Errors and messages are logged to the Windows system log, however if XWord does not have permission to log to the Win Log (which I've observed on Vista and Win7), then it falls back to a log file in the working directory.
However, when I typically run Word, the working directory seems to end up as c:\Windows or c:\Windows\System32, and as I run Win7, XWord is not allowed to write to that destination.
The exception thrown from the failure to write to a textfile log is not caught, and propagates up to Word but does not cross the DLL boundary. The end result is that the code path that creates the "loading" or "uploading" dialog boxes that XWord displays is never completed. The dialog box is left open and any code that should be run is not run at all.
See attached patch, I have caught the offending errors when it cannot log to a text file (the fallback option). In such a situation, it will display a message to inform the user of the problem once, and then will not log after that.
In addition, I have changed the location of the text log file to the user's temporary path, so we have a better chance of writing a log file.