Essentially it does work like folders on your desktop. You basically open Categories (it has its own icon) once inside the Categories app, yap on the "add" button. Now a box will open. Type in the name of the category you want (say, games for example). It will now open a page with icons on it.
You will choose an icon from these to use on your springboard. Once you have selected an icon, it will take you back a page. Now you will see youe new icon there. Tap on the icon, and it will open up your new category.
Now tap on "add" in the upper right corner. This will bring up a list of all of the apps on your phone. Select the apps you want in the category. Now you will see the icon for that app in the category. Now tap "add" again and repeat the process for all of the apps you want there.
When you are finished adding apps, tap done. Repeat the process for each new category you wish to make. Once you are finished with everything, tap the home button. Your phone will respring, and you should find you new icons on your springboard (don't forget, they may show up on your last page, not the first). Tap on the icon, and...SHAZAM! your apps should appear.
I hope this helps.
By the way, before doing anything serious with your phone...especially restoring, or upgrading firmwares, be sure to remove every app from categories. If you do not, then you risk having them turn invisible on you. You will not be able to get them back without using "Poof" to bring them back (there is a way to get them back in settings, but I can't remember how). And as a safety rule, never ever put your "Settings" in categories!
Now have fun.
