The Zune software monitors one or more folders on your hard drive for adds, deletes, and changes. I have tried to make a USB drive one of the monitored devices but the Zune software won't let me so I assume it's hard drive only.
The software processes the changes plus any changes you make while in the software and ultimately updates a database in Local Settings/User/App Data/Microsoft/Zune. From there it will be "sync'd" to the Zune device.
Once it's on the Zune, it will stay there until deleted (manually or by re-syncing). I guess the short answer is yes it needs to be on the PC to get it to the Zune. No, they do not need to be on the PC after that unless you plan on making changes, adds, deletes. Be careful though, if you remove them from the monitored folder and have auto-sync on, it will delete them from the Zune device.
Hope this helps. If I've got any of this wrong, please correct me.
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