Diamante, I have hundreds of books so I find the collections in Reader Library to be very helpful to keep them organized. The sync feature that keeps the collections on my computer and ereader to be automatically the same works easily for me. I just approach it like how I manage my music playlists in iTunes and then sync with my iPod. I seem to be one of the few people who likes the Reader Library software. Many people get headaches from the software. The syncing process creates duplicate books for them and a variety of other issues. I can't explain why it is so easy for my computer, but the Sony software seems to be very moody for some computer systems.
My current installation of Reader Library has no subfolders in kLibrary either. However, I know that I have notes somewhere on my computer because I can open books in the Reader Library software and see the notes. I can't figure out where "somewhere" is.
My file path is "....../Reader/Database/kLibrary". In the Database folder, I have several *.xdi files. My best guess is that the notes are stored within these xdi files.
The best option for me is to keep doing periodic backups of the folders on my ereader. At least you can see the individual *.annot files for each book on your ereader and can use those backup files to restore your annotations.