From Kelly's Korner:
http://www.kellys-korner-xp.com/xp_favorites.htm
Removing the Links Folder
TweakUI/Explorer/Uncheck Show Links on Favorite Menu
http://www.microsoft.com/windowsxp/pro/downloads/powertoys.asp
Manual Edits:
There are two methods that can be used to hide the Links folder, one using
the registry and the other using file attributes. Both methods are
detailed
below:
Automated Edit:
Remove Links folder from IE/Favorites (Line 93)
http://www.kellys-korner-xp.com/xp_tweaks.htm
Using the Registry - Start/Run/Regedit
HKEY_CURRENT_USER\Software\Microsoft\Internet Explorer\Toolbar
Set the String value of "LinksFolderName" to equal a blank string. Open IE
and delete the Links folder from the Favorites menu. The next time you
start Internet Explorer the Links folder will not be recreated.