Unusual snag, so just running through some lowlevel stuff - bear with it.
Question time.
Just for a warm and fuzzy: Confirm you can find all the favorites under the default favourite’s location.
C\Users\<user name>\ Favourites
What version of AVG do you have installed?
Have you had a virus/trojan or similar recently, and, if so, did AVG clean it?
It could be your AV is stopping stuff.
More questions.
Has Norton or McAfee application ever been installed on the computer?
Did a Norton or McAfee free-trial come preinstalled on the computer when you bought it? (Doesn't matter if you never used or activated it.)
In other news...
Give your hard drive a quick clear out - right click your HD in Explorer and select Properties|Disk Cleanup.
In IE, select Tools|Internet Options|Browsing History|Delete (or keep the delete on exit box ticked).
I recommend that you download and run Ccleaner, which really does clear away all the detritus of a day at the keyboard. Great piece of kit.
...and finally...
Check if any add-ons on the Internet explorer are causing the issue. Try opening Internet explorer in the no add-ons mode.
a) Click the Start button, click All Programs and click Accessories
b) Click System Tools, and then click Internet Explorer (No Add-ons).
Report back
