Apps get installed to a small fixed allocation of memory (322 MB), although with the many apps I have installed I've only used 50%. Moving the library to the SD card does not increase this allocation. From what I understand, it's only the app files themselves that are installed there; app data typically is stored in Internal Storage (of which we get 2.49 Gb). I believe with Android 2.2 (which is coming), you can install apps to the SD card, freeing you from this 322 MB limit.

If the Library is on the SD card, simply moving a PDF there does not add it to the library, you still have to use "Add to Library". Note that regardless of the location of the Library, "Add to Library" *copies* the file to the Library storage area, meaning there are now two PDFs. I always recommend deleting the original PDF/EPUB once you've added it to the Library so that you don't use up double the space (of course, you should always keep a backup of all files somewhere off your eDGe).

Regarding folders, you need to understand what the "Library" is. It comprises a set of hidden folders containing the files you've added, plus metafiles and metadata describing them and containing the annotations and links you've added to them. These files and folders are not normally visible to you, regardless of the location of the Library. The sole method for interacting with the Library is the Library app, which gives you tags, but not folders. Were you to rearrange the files and folders in the hidden Library storage directory, you would "break" the Library.