Within a Project, folders provide an additional way to organize Items within the Explorer view and for reporting.  You can have multiple tiers of folders based on how you want to manage the hierarchy of Items within your Project.

For example, in a product development Project, you may have multiple folders within your Set of requirements.  You may choose to add one folder for software requirements and another folder for hardware requirements.  The Explorer View provides a hierarchical view of Folders, Sets and Items, allowing one to drill-down to find Items.  See Adding a Folder for more information.

Note: See Moving Items for valid Folder locations.