ArcGIS Server allows you to organize your services in folders. You can create folders based on geographic regions, levels of security, web service messaging format, or other criteria. For example, you might create a Redlands folder and put all services related to the City of Redlands in it, or you might create a folder for high-security services and configure highly restrictive access parameters for it.
All folders reside within the Site (root) folder. In Manager, you see the root folder as containing all the other folders. Services can also reside at the root folder level. In ArcCatalog or the Catalog window in ArcGIS Desktop, the root folder contains all the services and folders visible immediately under the name of the GIS server. Web service messaging formats (in other words, SOAP and Binary) are set at the root folder level. Consequently, changes to this property affect all other folders inside the root.
Unlike the file system on your computer, ArcGIS Server allows only one level of folders; thus, you can't nest folders inside folders. If you only have a few services, you can put them in the root folder of the server without creating additional folders. If a folder contains services, it cannot be renamed.