I found the following reply on Apples Discussion forums, looks like it is a common problem but easily solved. It worked for me
Cheers Ry
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I ran into this from three different angles as a sys admin.
First a Mail.app user on 10.2 complained that they couldn't see any folders other than the INBOX for their IMAP account. It had worked on the previous version of Mail.app. But coincidentally when they set up their second IMAP account, the INBOX icon had a little triangle that when opened, revealed their two IMAP accounts. Each had a little triangle that when opened, revealed both accounts' folder structures. Moral: two accounts are better than one.
That didn't seem very cool, so I surmised that unlike previous versions of Mail.app and many other mail clients, Mail.app 1.2 wasn't able to determine the folder prefix automatically. I had the user go back to a single account and enter INBOX as the folder prefix in the account settings Advanced tab, and voila! the folders now appeared under a new account icon, even without the second account. INBOX happens to be the standard prefix on our Cyrus IMAP servers, but it may vary on other servers. You might have to contact your email hoster to get it, but other mail clients may show it in their preferences. Moral: Mac OS X still needs dirty little secrets.
Finally another 10.2 user also said they couldn't see any folders. My earlier approaches failed to uncover their folders. Looking into the account on the server, I found that the user had a folder hierarchy that included INBOX->INBOX->Drafts. The user claimed to have never created this hierarchy. They had only used Mail.app 1.x, and it appeared that one of the versions had built a questionable directory structure (INBOX inside of INBOX) that confused it. So I deleted the second level INBOX and Drafts from the server, as the user could not. Once the folder prefix was entered, all was well. Moral: be kind to your sys admin.