Robin:
If my memory serves me correctly, Alan said that having the ability to have infinitely recursive calendars added a lot of complication to the code. Nobody else spoke up to keep that feature at the time except me, therefore it didn't seem to be a popular feature, so Alan deep-sixed it.
Having said all of that, this may not be your problem. As I understand it, the current version of the module will allow you to have multiple children feed the same parent calendar. For example, let's say that you have 5 departments in your organization. You can setup a different calendar for each department, and then have all 5 of those department calendars "feed" their events to the same master calendar that's used for the whole organization. You can even setup independent sub-department calendars that feed each department calendar. Nonetheless, the events from the subdepartment calendars will show up on their department calendars, but will not show up on the organizational calendar on the top. I really need a white board to explain this better! Any way, I hope that this makes sense.
I've stayed back with the old version of the Events module for now (version 03.02.00) because we need the subdepartment events to roll all the way up to the organizational calendar. However, this old version has a lot of bugs (particularly pertaining to event notifications) that have been fixed in the current version of the Events module, so I wouldn't go back to the old version unless having recursive calendars that go more than 2-levels deep is absolutely critical.
Now, if someone else who is using the current version of the Events module has a different take on how the logic behaves when handling calendar recursion, I'm all ears!
See Ya,
Van