The Mercury News points out a fairly basic flaw in Google’s Desktop Search application: it cannot track files if you move them around on your hard drive (changing folders, moving folders, etc.). The application will index new files added to the computer, but it doesn’t notice when an already-indexed file is moved to a different folder.
The solution? Uninstall and then reinstall the program, and endure the hours it will take for it to re-index your hard drive. Then, repeat the process when you move files into new folders again in the future.