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How To Create Subfolders in Mail.app

In order to create a subfolder (and a folder that holds those subfolders), use slash (/) character in the folder name.

Creating a subfolder

Entering "Thesis/Virtuous Leadership" as the name of the new folder creates

folder "Thesis" at root of the account, and
folder "Virtuous Leadership" within the "Thesis" folder.
Following subfolders can be created normally by right-clicking on the "Thesis" folder and selecting "New ..".

Note, however, that folders can either contain subfolders or messages, not both. Apparently this is because of limitations in IMAP.

This method works for OS X 10.3, no other versions has not been tried.