How can I configure Lion server or mail.app to show IMAP subfolders with mailboxes?

Question

I'm sure we've all seen the weird IMAP glitch where mail subfolders appear down lower on the mail.app pane instead of nested neatly under the mailbox itself.  Usually you can get around this by changing the Inbox IMAP prefix to "" or "INBOX" or "/" or some such path that the server recognizes as the root path to your IMAP folder.  Unfortunately, this sometimes means you are unable to work with those folders or introduce other problems.
Since I am running Lion (Client) and Lion Server as my mail host, I would think that there is an appropriate answer to this either on the mail.app client settings, or perhaps with a Lion Server configuration through DOVECOT.  I don't mind if the solution is a command-line one, but I need to be able to easily set up my mailboxes so that mail subfolders appear properly under each mailbox, instead of being hidden away lower on the page where it is very inconvenient to find, especially when you are using multiple email accounts.
Client Machine Lion 10.7.3
Server Machine Lion Server 10.7.3
Please Help!!!!

Answer 1

I've tried editing /etc/dovecot/conf.d/10-mail.conf on Lion Server to add the following:
namespace private {
  type = private
  separator = /
  prefix = INBOX/
  inbox = yes
This puts me in a catch-22:
If I leave the "IMAP Path Prefix" setting in the account Advanced tab empty, I can see the subfolders and move messages in and out of them, but can't add or edit the folders or heirarchy.
If I set the "IMAP Path Prefix" to "INBOX" I can add and edit subfolders, but they don't appear nested under my inbox.
Please help!