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No this is not an XOOPS error. I had the same problem and so did a search in the forum for the words flat forum display or something of that ilk.
It is essentially a user error.
You see you went into preferences as told to do above, as I did. Then you went and viewed the forum, and DAMMIT it did not change.
Well hmmmmmm
I got to that point and instead of calling it a bug I looked further into it.
It seems because the default for the site in my case was nested. All of the users had defaulted to Nested too, including myself.
I had to go make the change in my user setting as well as my site preferences.
I am going now to see if I can edit the users current display method without going into the DB, Cool