Firstly, sticking with the GUI for the moment. I've converted the HTML to epub using option 2 of the three I listed above.
I have attached a screencap of the resulting epub when viewed on the PC using the calibre ebook viewer.
When I open the TOC panel (left-hand side 7th button from top), I see a list of all 63 chapters. If I click on one it takes me straight there. Screencap shows Chapter 2 selected.
Once sent to the PRS505 using GUI 'Send to Device', I select the book and press my 505's TOC button (button 5). It lists all the chapters and I can select whichever I want. I have also attached a screencap of the 505's TOC.
Which of these differs from your own experience?
Secondly, if you are trying to use the 'inline TOC' (i.e. the one with hyperlinks which is actually contained in the early pages of the book) then you will find that the HTML has coded the labels BEFORE the <div> and <h2> tags. Consequently when you press a hyperlink it will take you to a point just before your chapter heading and you will need to turn to next page to get to the selected chapter heading. Personally, I find these inline TOCs more trouble than they're worth.
Thirdly, I don't use the commandline version of ebook-convert myself but I do know that it has a large number of options which need to be set to customise your conversion. Here's a link to the relevant part of the
User Manual.
... and finally... I'm not sure how removing the images will solve your problem. They show up fine on my 505.