@ heshy
I have found that "favorites" can mean IE Favorites to one person and Bookmarks to another. If you mean IE Favorites then make sure that the IE Favorites plugin is active. That is done from EDIT - PREFERENCES - K-MELEON PLUGINS - IE FAVORITES. Note KM is shipped with Bookmarks active but not IE Favorites. If you activate IE Favorites, a restart of KM is required. I use favorites from the menu but there is a favorites bar. That must be activated from the Favorites Bar tab of the same panel where IE Favorites is activated.
By default any new favorite added is placed in the folder "Favorites". There is an option to have a sub-folder under the favorites folder to hold new additions. That is located on the general tab of the panle where IE Favorites is activated. If you want the ability to rename new favorites and add them to any sub-folder under favorites there is a macro called FavRenAdd in the macro libarary.
http://kmeleon.sourceforge.net/wiki/KmmFavRenAdd
If this information does not solve your problem, please post back with more details about what actions you are taking and what is or is not happening.