Sub Albums

You could use the taxonomy module to categorize your albums. If you don't know how to use taxonomy, here is a short help on getting started...

Hint: I'm not sure about the exact names as my site is in german and I'm re-translating it...

1. If not yet done, enable the module at admin/build/modules

2. go to admin/content/taxonomy and create a new vocabulary, set the fields and options as you wish and enable it (atleast) for the node type album

3. in the overview, click on add terms (last option). terms are your folders/categories/tags. Add some terms (there you can also make hierarchies, add synonyms and so on)

4. Edit your albums (or create new ones) and choose/write one/multiple (depends on your settings) terms of your vocabulary. The terms are now displayed below your album and by clicking on them, you can view all albums with that term

5. Optionally, you can create menu links (manually or with a module) to the term lists. There are also many other modules aviable to configure the display and administration of your terms.

This should give you even more options than sub-albums...

Yes, you should use taxonomy.module. In fact, image.module the same.