To create a folder with iOS4, follow the steps given below:
Step 1: Click and Hold any app with your finger till it begins shaking.
Step 2: Drag any app and drop it on another app which you want to put in a folder. You can continue this process till you have added all the apps you want to the folder.
Step 3: To create new folders, just repeat Step 2.
The folder feature in iOS4 is really useful and will allow you to club similar apps together making it easier to find and open apps. However, a folder can only store up to 12 applications. I expected it to be able to store an unlimited amount of applications but I was wrong.
Guess this is better than none. I am sure future versions of the operating system will have better features than this one.