XML to XML

I need some help in writing xsl to transform XML to XML.
I am getting lost in concepts of having multiple templates

Original:
<Categories>
        <Category>
                <Code>A</Code>
                <Description>Airplanes</Description>
        </Category>
        <Category>
                <Code>AA</Code>
                <Description>Airplanes (ARF)</Description>
        </Category>
        <Category>
                <Code>AAE</Code>
                <Description>Airplanes (ARF), Electric</Description>
        </Category>
        <Category>
                <Code>AAG</Code>
                <Description>Airplanes (ARF), Giant</Description>
        </Category>
        <Category>
                <Code>AAP</Code>
                <Description>Airplanes (ARF), Sailplane</Description>
        </Category>
        <Category>
                <Code>B</Code>
                <Description>Boats</Description>
        </Category>
        <Category>
                <Code>BA</Code>
                <Description>Boats (ARF)</Description>
        </Category>
        <Category>
                <Code>BAE</Code>
                <Description>Boats (ARF), Electric</Description>
        </Category>
<Categories>


Final Result - where one letter, two letter, and three letter categories are
nested.


<Categories>
        <LevelOneCategory Code="A" Description="Airplanes">
                <LevelTwoCategory Code="AA" Description="Airplanes (ARF)">
                        <LevelThreeCategory  Code="AAE"
Description="Airplanes (ARF), Electric"/>
                        <LevelThreeCategory  Code="AAG"
Description="Airplanes (ARF), Giant"/>
                        <LevelThreeCategory  Code="AAP"
Description="Airplanes (ARF), Sailplane"/>
                </LevelTwoCategory>
      </LevelOneCategory>
        <LevelOneCategory Code="B" Description="Boats">
                <LevelTwoCategory Code="BA" Description="Boats (ARF)">
                        <LevelThreeCategory  Code="BAE" Description="Boats
(ARF), Electric"/>
                </LevelTwoCategory>
      </LevelOneCategory>
<Categories>

Thank you!


Jim Han





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