I confirmed with a call to Apple today that this feature does not work as advertised. There is no way to select a folder, only individual files.
HOWEVER, through frustration I realized there is a fairly SIMPLE WORKAROUND for those of you that have organized music libraries!
1. By all means, definitely hold SHIFT down while clicking File>CreateNewVersion>AAC
2. When the "Convert" dialogue comes up, browse in the left pane of the dialogue box to the highest level folder containing the music you want to convert.
3. In the right pane, use the search field to enter a wild card search, such as *.m4a or *.aif, which will then search for all of the music in that folder and its subfolders and give you the results in the right pane.
4. Then select-all in that pane and VOILA, all of the subfolders and files in those folders will convert using your preferred import settings, keeping the originals where they were and in pristine high res format, and putting the converted files into your itunes library.
5. Repeat as necessary in the folders of your choosing for different source music formats, i.e., different file extensions.
