Collections are kind of a psuedo folder you can create in internal memory on the 500 (you can also do so on cards in the 505). You create them in the ConnSoft via the little "plus" (+) icon at the extreme lower left — just put the cursor where you want the collection, and click the button then name it. Collections let you do a couple of neat things like sorting the books the way you want them rather than alphabetically (great for series and "to read" lists), and you can transfer the entire collection as a unit to the Reader from the PC or vice versa (though you can't delete that way, and deleting in a collection only removes a book from the collection, not the Reader or ConnSoft). Obviously, it also allows you to have a set of shorter book lists rather than just the one giant flat one in the Books menu.
