Using FeedReader 3.07, I have feeds in a sub-folder in a top-level folder and both "Hide read articles" and "Hide read feeds" is checked.

The unread count for each feed is correct.
The unread count for sub-folders that have unread feeds in them is correct.

The problem is with sub-folders that do not have any unread feeds in them. After other feeds in the same top-level folder are updated, these sub-folders often have their unread count set to a large number. However, the top-level folder's unread count is always correct.

Once all the feeds below the top level folder are read, it is correctly hidden -- so this isn't too big of a problem.