[tshering]

I had no problem jumping to chapter 3, but my touch (FW 2.6.1) hung up after setting some highlights and paging.

If you look at the xhtml files, you will notice that in each file the tag <span class="koboSpan" id="kobo.6.2"> is not closed before the next kobo tag, <span class="koboSpan" id="kobo.6.3">, opens. Instead, it is closed at the end of the chapter.
This causes problems with highlighting, and probably also with the TOC navigation.
You can try this: put </span> in front of <span class="koboSpan" id="kobo.6.3"> in each file, and delete the last but one </span> in the paragraph (= in the chapter).

Try setting a highlight that contains the heading and some lines of the following text. With the original version, the whole chapter will be highlighted. With the modified version, it works as it should.

If the kobo spans of this book are set by the most recent plugin for calibre, you might consider writing a bug report.

Note: I only looked at testTOC_0.kepub.epub.