goto IE's Favorites menu option, (not the icon button but the menu where File, Edit, View, etc is), and select "Organise favorites"?
In there you can create sub-folders and move the shortcuts to them as you wish.
I have a total mess that's grown over the last few years regarding bookmarks/favorites. I've wound up with many entries in the favorites selection that are doubled-up, un-sorted-able, not able to arrange in any order that's workable. There may be many helpful apps out there that could aid in this problem, but I'm not aware of them.
Will IE not behave and will I have to find an outside app to control IE's listings?