I had the exact same problem (reader not responding for more than a minute after word selection, then sometime incomplete display of directory entry). for some time, then I added a microSD card, moved all my books to it (directly from one drive to the other). Still had the problem. Reformatted the reader's internal memory (that already didn't contained any book) => Problem disappeared ! Then I added and removed some books on the microSD card (everything done using Windows 7 Explorer, always "ejected" unit before physical USB disconnection) and the problem was back !
I think it's a corruption of the database and/or thumbnail cache: I only deleted the content of the d:\Sony_Reader\database\cache\books directory that contained directories containing the thumbnails of the books and d:\Sony_Reader\database\*.db files => the problem disappeared again !
Warning: you will loose all your annotations, page marks etc. if you do that, and it take some time (minutes, depending on the number of books) to rebuild the database and the books "reappear".
I think it's related to deletion of books (and perhaps adding them back but in a sub-directory)