Hover your mouse over each of the numbered callouts to highlight the associated area of the Manage Categories screen.
In addition to being able to manage a category's nesting through the Edit Category dialog, a category row in the Manage Categories screen can be dragged onto another category.
When a category is dragged on top of another category, the category beneath is highlighted.
If you release the dragged category here, it becomes nested within the highlighted category.
When a category is dragged to the very top or very bottom of the category grid, a thin marker, or "drop line", appears, indicating the target location.
If you release the dragged category here, it is moved so that it is no longer nested within another category.