It is very likely there are a bunch of photos in your Picasa photo collection that are displaying the incorrect date and time when the photos were taken. And this isn’t just a problem when your photos won’t sort chronologically. This will also be an issue for you every time you create a new folder or album inside of Picasa and it constantly tries to identify them use the wrong date.
You will need to change the file metadata. The metadata in digital pictures is called EXIF and you can modify that with a reasonable photo editing program like The GIMP (which is free.) Go to File -> Properties -> Advanced in The GIMP and you can see and then click to modify the various EXIF information such as date and time taken.
MU_Engineer: thank you for the recommendation on using GIMP. I used GIMP and followed your guidance on changing the EXIF information to change date & time of photo, but cannot find a way to save the photo back out with the new metadata. can you provide further input on this?