Visual Studio 2010 extends the concept of a folder as a “first-class” branch and introduces the tools to convert folders to first-class branches to enable exciting new Branch Visualization and Tracking Changes features. For reference, please see http://blogs.msdn.com/hakane/archive/2009/05/19/enable-branch-visualization-in-upgraded-team-projects-tfs-2010-beta1.aspx and http://msdn.microsoft.com/en-us/library/ms181423(VS.100).aspx.
Source Control Explorer context menu and toolbar have the button to convert a folder to a branch but not one for converting a branch back to a folder. You can find that functionality from the main menu under File > Source Control > Branching and Merging. Note that Reparent is also available there.