Well, I think you lose something by not having XP and still using W2K, but that's another story altogether.
As far as loading ebooks into your reader you might be fine without the CONNECT software. If you don't need to load any DRM content, which CONNECT allows you to purchase from Sony's web store, and you don't want to register the ebook and use your $50 store credit, you can keep using ebook.py to load books into your reader. Just keep copying your PDF, RTF and LRF files into the /Data/media/books directory, and you will probably be OK.
CONNECT does give you a few nice useful features though, especially if you are looking to start developing content. CONNECT can show you the content close to the way you see it on the device's screen, it can show you the bookmarks you saved, the file info, and some other nice stuff. I think the Reader is a better product with such software than it is without it.