Well, I think my reveling was premature. I don't think the klibrary.xdb file is going to be useful for restoring annotations for specific books. I'm not sure what format the file is in, but I don't think it's designed to be edited in a text editor.
Also, the more I experiment with Sony Reader Library, the more I seem to fall into the category of people for whom it doesn't work properly. I thought if I set it to sync a specific folder with my Reader device I might get some usable annotations files, but I'm not sure what Sony's definition of "sync" is. I created a folder under my user name and added it as a "favorite" in Reader Library. I then connected my Reader and set it to sync that folder and nothing else. I assumed that doing that and then syncing would result in all the books on the reader being copied to the folder, but when I synced, nothing happened. Okay, so I apparently needed to place books in that folder for any syncing to happen. I did that and with a sync successfully transfered a few books to the Reader. I made some test annotations on the Reader and did another sync. The annotations showed up in Reader Library. Now for the bad stuff. Even though I have Reader Library set to merge annotations when syncing, when I added new annotations on the computer they were not transferred to the Reader; in fact, on every sync the newer annotations on the computer were erased. That's an unusual definition of "syncing." Immediately after each of these botched syncs, the first time I clicked on the synced folder in Reader Library, I got an error message that said something like "Invalid reference!" That can only be a bug, and I would guess that it has to do with Sony Library not fully supporting the Vista OS. Also, the annotations that were transferred from the Reader to Reader Library are apparently stored in the same place as other annotations, so I see no reason to have a separate sync folder. I deleted the folder. From now on I think I'll use Calibre to transfer e-books to the Reader and as I read them I'll use Reader Library to copy them over from the device (they'll automatically go into the klibrary folder) only so that I can view annotations on my computer, export them to RTF files and easily manage the collections that are on the Reader. Maybe there's something about my specific Vista setup that Reader Library doesn't like, but it's simply not working the way it's supposed to.
Backing up the files on the Reader device should enable me to restore annotations if necessary. Thanks, Bookwoom_Girl, for the pointers on how to do that. By the way, you mentioned that you use the sync collections feature -- are annotations that you make on your computer properly merged with those you make on your Reader? Maybe I should try it with collections instead of folders...
boxcorner, I'm afraid it doesn't look as though I'll be coming up with any authoritative information on Reader Library that would be worth putting in a FAQ.