jQuery-ui sortable and droppable list

jQuery-ui sortable and droppable list

I'm trying to achieve a folder like application. I asked this question a couple days ago on stackoverflow.com ( here) This is in short what i want to do.(Think of it as grouping in photoshop)

  1. <li>Folder1</li>
  2. <li>Folder2</li>
  3. <li>Folder3</li>
  4. <li>Folder4</li>
  5. <li>Folder5</li>
The list above should both be sortable and droppable. This means if you drag one folder into the other one this will happen:

  1. <li>Folder1</li>
  2. <li>Folder2</li>
  3. <li>Folder3
  4.       <ul>
  5.             <li>Folder4</li>
  6.       </ul>
  7. </li>
  8. <li>Folder5</li>
I have tried many different ways to solve this problem, but none of them worked the way i want them to. 
I would apriciate it if anyone had a solution to my problem or guidelines i could folow to achieve this. 
My last resort is to modify the jquery sorce to suit my needs. But if it's possible to work around it then that would be the best. 

Yours sincerely Bjarte.