I setup a test dovecot-1.0-0.beta8.2.fc5 and left most of the settings as the defaults. In Thunderbird 1.5.0.8 Windows, when I tried to create a subfolder named "subfolder" under INBOX, it showed up as the same level a INBOX and with the name "INBOX^subfolder".
I was able to manually create a subfolder using "mkdir ~/mail/test_manual_subfolder; touch ~/mail_test_subfolder/blah" and then subscribing to it. That's too much work. :)
Now when I try to create a subfolder of a non-inbox folder, nothing happens (not even an error).
Screen shot: http://img452.imageshack.us/my.php?image=subfoldersthunderbird15ao6.png
The Dovecot system is Fedora Core 5 x86 and an NFS client for /home. I'm considering switching from Trustix, UW-IMAP, and mbox. I'm also considering changing INBOX to a Maildir (not /var/spool/mail/%u).
Andrew