A folder is used for storing e-mails.  For example, your Inbox stores new and undeleted e-mail while your Outbox stores e-mail waiting to be sent.  You can create new folders to hold specific types of e-mail.  You can even enable Mac Mail to automatically filter and place those emails in the folders you create when the e-mail arrives.  For information on filtering, click the 'Message filters' link above.

Note:  these screenshots cover for Mail for OS X Panther (10.3).

To create a folder, click the Mailbox, then New.