I use that same adapter with a 4GB SanDisk SDHC card, so it's not the problem. It's possible that your card has too much capacity, though, as some people have reported trouble using cards with > 4GB capacity. Is your card formatted to FAT32? If it uses exFAT, it won't work with DreamShell. Try reformatting it with your PC and then copying files to it.
And just to confirm, all the Dreamshell folders should be at the root of the card, right? Meaning, when you look at the card in WinExplorer, you should see the folders "apps," "cmds," "doc" and so on right? Or should you just see a folder that says "DS"?
I don't think I put any folders on my SD card. I placed my ISOs on the root of the drive and booted them through the ISO boot menu. I never tried doing anything else with DreamShell.