The normal way that you see folders in Picasa is called ‘Flat Folder Structure.’ In the Flat view you won’t see that certain folders are within other folders. If you want to see what folders are nested within other folders, you need to view the folder list in ‘Tree View. To get there, just click the ‘Tree Structure’ button in the top toolbar. It’s right under the word ‘Picture’ in the menu.
Take a look at the images below. On the left is the Flat view, notice the Grand Canyon folder. It’s listed in the Flat view along with every other folder in your Pictures. On the right is the Tree View where you can see that the Grand Canyon folder is within October, and October is within 2004.