You can stuff all the images in one directory ...
/images

But if you have a lot of products you may want to organize things ...
/images/something
/images/somethingelse
/images/someotherthing

These directories will appear automatically in the dropdown where you add the image to the Product to allow you to say either:
Main Directory ( /images )
something ( /images/something )
somethingelse ( /images/somethingelse)
someotherthing ( /images/someotherthing )

NOTE: if the directories are not set to 777 you will receive error messages when trying to load to those directories ...