I use Visual SourceSafe with Visual Studio. Every time I work on a project for a while, the directory structure on my harddisk gets messed up. The latest versions of the files are going to their own nested folder, so I end up with "C:\VS2005\Projects\MyProject\MyProject\MyProject\MyProject"
What is causing this?
I can't help with your particular problem, but I remember my own pains using SourceSafe just a few years ago.
If you have a choice on the source control system you use, I'd recommend taking a look at other options. There are several good ones to choose from.
I switched to SVN and never looked back. It is light-years better than SourceSafe and setup only takes a few minutes if you use visualsvn server (a free product). As for Visual Studio integration, visualsvn client is about $50, or just use ANKH + Tortoise (both are open source and very good). Bottom line is that the switch doesn't have to cost any money, and the installer packages are quick to get the system running on both the clients and the server.
Hope that helps, and good luck with SourceSafe if you have to keep using it.
Update: See also, this thread
What is causing this?
Just the general contra-expectation insanity which is VSS and VS combined I'm afraid. You could spend the time to really get to know VSS and how it thinks of things and how to avoid the quirks and pitfalls, but the thing is such an outdated beast I'd second Robert's asssertion that it's more profitable to get yourself a copy of SVN and VisualSVN and never worry about this again.
I can not help but be in agreement with the other gentlemen, run away from VSS as fast as you can. If you have not been bitten by it already, you will. Any tool will be better, be it Subversion, Mercurial or others. The fist two have extensions named Tortoise{SVN,HG} that will enable you to play with a user-friendly interface if you don't like CLI tools. My own choice is HG (also known as Mercurial) as it is a decentralized/distributed VCS which enable offline work/commits and easier distributed work.
You're going to need to get an old priest and a young priest... or a better version control system.