The location of the Favorites folder in XP is generally:
C:\Documents and Settings\<username>\Favorites
If in doubt check the Favorites REG_SZ value in:
HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Explorer\ShellFolders
If you add a site to Favorites in Internet Explorer it is saved in the Favorites folder as an Internet Shortcut (.URL) file which is a text file.
If you add a folder to Favorites in Windows Explorer it is saved in the Favorites folder as a Shortcut (.LNK) file.
So basically you need to check your Favorites folder and see what's in there.