I've been experimenting with Vista (Enterprise/VLK) in preparation for a volume deployment, and I redirected a standalone box's Favourites folder to a secondary partition.  (This was NOT done with a custom install script; a vanilla install was done.)  This is an x86 install on an IBM T60 (2007-62U) which is a Core Duo 2.0 GHz machine, 1 stick of 1 GB RAM, RADEON x1400 128 MB, 100 GB HDD, 8X DVDRW/RAM, a/b/g wireless, 14.1" 1400x1050 screen, Bluetooth.

I went into the user's folder, right clicked on Favourites, and went over to the Location tab and moved the folder:

Then I go into IE7 and try to create a new shortcut, only to be greeted by this error:

IE generates an "Unspecified error" once the Favourites folder is moved.

So I go move it back to the default location, and favourites are now properly created.  For a good measure, I had changed the NTFS ACLs on the new location, and added "Everyone" to the access list with modify privileges.  This did not resolve the problem.  So, I am keeping the Favourites folder in the default location inside the user profile, on the system drive.

Perhaps someone would like to run Filemon and identify the problem?