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There is no direct relationship between FotoAlbum albums and Windows Folders. An album can contain pictures that exist in any folder within the Picture Folder. Likewise, the picture folder can contain any number of folders and sub-folders (that have no relationship to albums).
You may choose to organize your files within your picture folder in addition to organizing them using Albums and Groups. This is often useful when you have a large number of pictures.
You can import albums based upon existing folders by using the Import Wizard. And you can export your albums with folders for each album using the Export Wizard.