The xdb is a database file of some sort so you probably need the correct database software to interface with it. It is probably communicating in some way with the xdi files which look to be index files.
Yes, you are correct. I sync collections. Within Reader Library, I have used the + sign in the lower-left corner to create collections to organize my ebooks stored on my hard-drive under the Library category. Then I plug in my ereader via USB so it shows up in Reader Library. I expand the drop-down box need to its name. Click on the sync tab and then select which collections that I want to sync. Then click the sync button. After that the process is automatic. It syncs on its own the next time you attach your ereader. But, you can always reopen the sync tab anytime and change which collections you want to sync.
Initially you have to setup your collections based on your hard-drive files, i.e. you see a list under the header Library in the Sony software. And when you want to add or delete files, you have to do it on the collections on your hard-drive files. Then you connect your ereader and it auto-syncs to match. You can't create collections on your ereader and then try to sync them back to your hard-drive.
I do have the "merge notes" option checked on, and it works like it should. I just did a simple test case to make sure. I opened a book on my hard-drive and added a highlight & note in Reader Library. (Tip: If you highlight text on your screen in the Sony software it doesn't actually create a note unless you right click the highlighted text and select "Create highlight". Otherwise it doesn't save the highlight.) Then I opened the same book on my 950 and made a new note there. Then I connected my ereader and Reader Library did a sync. After I disconnected, the book on my hard-drive now shows the note I made on my ereader and the book on my 950 now shows the note I made on my computer in the Sony software.
This merge note feature comes in handy because I have 2 Sony ereaders. Both are set-up to sync to the same collections in Reader Library. So I can make notes on one ereader and then after syncing both with my Mac, the notes will show up on the other ereader.
Hope that helps. When the Sony software works, it is pretty smooth. That's why some people like me use it rather than calibre. However, I appear to be in the minority of people who have good success with the Sony software. I'm sorry it doesn't appear to function as well on your computer, diamante. Thankfully there is calibre!