My first comment is that although you are creating TOC links in the file, the Table of Contents page is *not* hyperlinked. What are you using to create the hyperlinks? I've been using the "hyperref" package (included with tetex) and it generates the same links you generate as well as making the entries on the the Table of Contents *page* live.
I've also had better luck with Helvetica than any of the serif fonts on the Sony Reader. I see that you are using Bookman -- once I copy that over to my Reader I'll see how that looks. I'd *like* to use a serif font, but the Sony does such a poor job with TR in PDF files that I haven't been able to. Maybe Bookman is the answer.