Look at the bottom of the navigation pane. You'll see buttons, large and small. Each corresponds to a different navigation pane. The Favorite Folders list appears only in the Mail pane, not the Folder List pane. Therefore, you should click the Mail button to see that list.
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Sue Mosher, Outlook MVP
Author of Configuring Microsoft Outlook 2003
and Microsoft Outlook Programming - Jumpstart for
Administrators, Power Users, and Developers