If you selected the drop-down menu within the Create in: section, you should now see a list of sub-folders currently available within your Favorites. In the example below there are several sub-folders available. If you wish to save your Favorite within one of these folders, select the folder name. The drop-down menu will now disappear and the folder name which you selected will be displayed within the Create in: section.
How to Add Favorites to Internet Explorer 7
By Scott Orgera, About.com
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