Jalbum allows two ways of working with files and folders:

• The "direct, file management approach", where Jalbum works inside your orignal image folders. If you move or delete images showing in Jalbum, the same operation will be reflected on disk. This is also the approach where Jalbum maintains its control files and .jalbum folders in the same folder structure as your original images.
• The "virtual approach", where Jalbum keeps its stuff in a separate location and only links to your original images.

If you want to go with the virtual approach, that means you cannot use Jalbum to organize your physical images on disk, but that might be ok with you. The virtual approach also runs the risk of ending up with broken links if you move around your images after having fed them to Jalbum.

Anyway, now you wonder how to pick either approach. Here's how:

• If you start Jalbum by dragging and dropping ONE image folder, Jalbum will use the "direct, file management approach" for that folder and its subfolders.
• If you drag and drop a bunch of images onto Jalbum, Jalbum will use the "virtual approach" and create a project folder (if no project was active) to manage that album in a separate location on your disk (usually under My documents\My albums[album project folder]).
• If you drop SEVERAL folders onto Jalbum, Jalbum will use the virtual approach, linking to those folders (links are indicated by a small arrow in the lower left corner of thumbnails and folders by the way). However, and this is important: If you open any of these folders within Jalbum, you're taken directly to the target folder, and you're now working with real files and folders, i.e. Jalbum might now start creating its control files inside that target folder. There are two ways of avoiding this: Either make sure you never drag and drop folders onto Jalbum or CONTROL-drag folders onto Jalbum instead. When folders are CONTROL-dragged onto an already open project, Jalbum will create empty folders with the same name as the dragged folders under its own folder tree (under My albums) and fill these folders with links to the contents of the dragged folders, but here is the good news: For any dragged folder containing subfolders, Jalbum will repeat this process of creating "shadow folders" with links to the content, thereby preventing any risk of touching the original directory tree. In essence, Jalbum will create a mirror tree of the dragged tree structure that only contains links to the files of the original tree.

I will probably even make a screencast on explaining things like this.

Since jAlbum 9, the behavior has been altered a bit to avoid confusion. You now need to hold down a qualifier key while dropping a folder to get the "direct" mode. Please read this blog post: http://jalbum.net/blog/entry/managing-images-with-jalbum/

Just read the blog post. I'm referring to keys like CTRL, ALT and SHIFT. Which one depends on your operating system.