When I first started to play with a Reader, I just copied the e-book to an SD card. Folders are fine, as are subfolders. When you insert the card, the Reader shows an animated busy signal while it searches for all the e-books across all folders and adds them to the book list.
Either then, or after a books is opened from the SD card, you will get a new directory structure and a file that looks like this: \Sony Reader\database\cache.xml. But you don't have to put e-books in that directory structure.
And yeah, I think that to manage the contents of the internal memory, you have to use the Connect software. But I plan on leaving an SD card in the Reader all the time anyway (except when it's in the card reader slot).
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