Try these tips:
Favorites Missing and/or
Change the Location for Favorites
Go to this Registry key and check the path for the value "Favorties":
Windows XP:
[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Explorer\Shell Folders]
"Favorites"="C:\Documents and Settings\{username}\Favorites"
Windows Vista:
In the Start Menu's Search box, or in the Run command, enter: shell:Favorites
The folder should be recreated, if not immediately then after a restart.
Favorites Menu is Missing or Greyed Out
Go to these Registry keys and, if found, delete the value "NoFavorites"
[HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows\CurrentVersion\policies\Internet Explorer]
[HKEY_CURRENT_USER\SOFTWARE\Microsoft\Windows\CurrentVersion\policies\Internet Explorer]
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