iPhoto works this way:
It ingests (that is, copies) your photos into it's library, and allows you to organize them into "events." Behind the scenes (in a database you don't normally see), events roughly correlate to system folders BUT events can't be nested. So, you can have an event called "Oct 2007" and an event called "trip to London 2007" But there is no way to have an event called "2007" that contains sub-events for Oct and Trip to London. (btw -- there is a way to open the iPhoto database and manually take photos out of there. So, by using events, you can roughly organize photos in iPhoto that can later be pulled out in folders. HOWEVER -- do not take anyones advice to "show package contents" on your iPhoto library unless you completely, absolutely know what you are doing -- many people have corrupted their iPhoto libraries by poking around inside it when they shouldn't have).
You can also set up "albums" within iPhoto and Albums can be nested in iPhoto, BUT they do not correlate to actual folders in the operating system. So, the nesting is never reflected at the OS level.
iPhoto works best this way: if you keep things in high-level events, and then add keywords to all your photos, and find or group things based on keywords and date.
For instance, I have all my photos broken into spring/summer/fall/winter by year (spring/summer/fall/winter 2006 are 4 separate events), with a couple of other events for special items (like when I take pictures of things I sell on-line). Everything has keywords, then I create "smart albums" which automatically grab photos with certain keywords in certain date ranges, and organize my photos from across events into smart albums that I find relevant. If you use iTunes, smart playlists is the same concept as smart albums.
Once iPhoto has your photos imported, if you make any kind of edit (crop, saturation, red eye removal, etc.) iPhoto makes another copy of your photo. It keeps the original photo intact as an "original" and then makes a new photo reflecting the changes. You WANT a program to NOT change your original file, so you can revert to it if you really screw up your edits. This is a benefit, not a problem.
When you do make edits to iPhoto, there is a database that iPhoto uses to keep track of your edits. If you later make further changes, it applies the changes to the original, deletes the old edit copy, and creates a new edit copy. In this way, you can edit without destroying the original (a menu picked called "revert to original" is there, to go back to the original any time you want.)
Now, there IS an option to NOT have iPhoto copy your pictures into its database when you import photos. JUST BEWARE: if you don't import then into iPhoto and allow iPhoto to manage them, then if you move the photo later outside of iPhoto, iPhoto CANNOT find the photo, and returns a file not found error. It makes perfect sense when you think about it, but many people get so upset over this.
Still, there are far less errors if you allow iPhoto to copy your photos into its database. But, some folks (rightly) say: I like my folder structure, and I am also concerned if I ever stop using iPhoto, then I am stuck with flat events, with no folder hierarchy. If you fall in this camp, then you can try to use iPhoto without import, OR you can try other tools -- Picasa on Mac doesn't offer quite as nice editing tools as iPhoto (IMO), but allows you to organize photos the way you want to. More advanced tools like Aperture or Lightroom are also more flexible.
If you are a friends/family/vacation photographer (i.e. not a pro) and you only take jpgs, then give iPhoto a try, but just keep your originals around in case you don't like it.
If you are shooting in RAW, and need a lot more from your photo editing workflow, then I assume you wouldn't be asking this question, and would also suggest iPhoto might not meet your needs.
Hope that helps (somehow)
