I would use LaTeX. Although LaTeX has a steep learning curve, it is specifically designed for high quality typesetting and is widely used to produce complex works. There are templates and tools to output epub, mobi, etc formatted books.
While you are proof reading and correcting, you would also markup chapters, sections, indexable entities, footnotes, etc. LaTeX then will generate ToC, index, bibliography, etc. You only need to choose a different template or just options to handle different layouts, etc.
If the images are not too distorted, it might be possible to use Gimp, etc to restore them to near correct shape, proportions, etc.
Latex definitely could make a great book. It has all the neat tricks that the writer of a book can dream and will be extremely pleasant to read, but unless you know it yet, you probably could want to ask the help from an expert on the language.
You can use calibre to convert the pdf to epub later
> There is an extensive cross reference and table of contents that I have no idea how to deal with
Yep, definitely sounds like a job for Tex and friends, born for managing complex cross references and extensive bibliographies. Unless the book is written in an exotically arranged language, Latex should be more than enough. You can include images on your book easily, annotate them, place arrows, draw over the figures or include hyperlinks to open an internet webpage.
While you are proof reading and correcting, you would also markup chapters, sections, indexable entities, footnotes, etc. LaTeX then will generate ToC, index, bibliography, etc. You only need to choose a different template or just options to handle different layouts, etc.
If the images are not too distorted, it might be possible to use Gimp, etc to restore them to near correct shape, proportions, etc.