So I'll tell you how to do it in Windows ME. Hope it is not totally different in XP
Right-click on Taskbar, properties, advanced, advanced again, to edit the start menu folders.
Can also be done from Windows Explorer, just by navigating to C:\Windows\Start and adding new folders, then dragging shortcuts around. First method may be better.
Once you've added a new folder, you can rename, sort, move shortcuts from the Start menu itself using mouse right-click.