One major issue is it does not denote paragraphs. It uses <br> tags to separate them but <br> is just an empty line. So often the entire document is put into one paragraph.
EPUBs have one or more HTML files within it. The PRS has a maximum size (I believe this is for all readers using Adobe's Mobile Reader software) one of these HTML file can be. With EPUB output a large document is split on paragraphs to accommodate this size restraint. What may be happening (Kovid is the EPUB expert) is the file is not being split thus not able to be read on the PRS. Do you have one of the Sony output profiles selected this should force the splitting when necessary (you won't see any difference, it's all internal)?
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