When you index your music into Phatnoise Music/Media Manager and then put that music into a playlist on the DMS, in whatever format you want to put them into a playlist, the directory structure will be duplicated onto the DMS from the drive the music is copied from.
The Phatbox / keg do not use directories for any management of playback, thats all done via playlist or artist album genere formats based off ID3 data.
