One other thing I found that seems to cause the Library to hang when connecting the Reader -- at least in the case of my PRS-505 -- is having the Reader too full. Over time, I started to notice that those times when I've come close to maxing out the storage space on the Reader, the next time I connect, it hangs up (with the resulting loss of all collections and bookmarks when I finally get frustrated and pull the plug). But, when I left a little over 20Mb free (that seems to be the "sweet spot") when I disconnect and reconnect, there's no problem.
I'm not an expert on this, but I have a hunch that the Reader needs some internal "slack space" in order to handshake with the Library software -- maybe to rebuild the media.xml file or something like that. Anyone with a higher level of "Geek-fu" and a lot more detailed knowledge of the eReader's architecture want to take a stab at this?
Now, I haven't tried it with a memory card installed, so I'm not sure how that would work (maybe you have to leave even more free space on the Reader to allow for the card?).
Just my two cents. So far it seems to be working for me. Hope it helps!