From my experience recently, it seems that as long as the files are either in the main directory or stored within a folder on the drive you are ok. But songs that are in a folder within another don't seem to be recognized.
I tried dumping most of my song library (small compared to many) onto an 8GB Cruizer, and some were set up as a band named folder that had album-named folders that contained the actual mp3's. I was never able to get those to play.
The easiest way was just to dump the individual files onto the Cruizer and plug it in from there - no chance of them being "hidden" from the indexing.