Do you have any custom books on the internal storage? Is your internal storage full (or close to it) so it possibly runs out of space when populating the database? After deleting the /system/ folder, does it recreate the folder, and is there an EB07W.sys in there? Try cleaning out the internal memory's /book/ folder, there's also /book/download/ which may cause trouble if there's a half finished download in there.
I'm using a Sandisk Ultra II 2GB card myself, works fine for me using 1.29 (and any other firmware really), so it must be something about your setup. I don't own any 32GB cards so I can't test. The largest I have is a Sandisk 16GB but it's MicroSDHC and I don't have an SD adapter for it.