FOUND THE SOLUTION OF THIS HERE IS HOW IT GOES:

IN FILE /components/com_k2/models/itemlist.php
ON LINE 208
instead of:
$orderby = 'i.ordering';
try this:
$orderby = '(SELECT ordering from #__k2_categories where id=catid), i.ordering';

and add the nested select statement like this to any ordering scheme you are using. This basically orders first by category ordering and then by item ordering.
Hope this helps.