I think this is only available with IE 5.5 under WinME but if you go into the Advanced Panel of the options there is an item on it listed something like this (don't have WinME handy right now to check): "Hide infrequently used links in Favorites". If you turn that on, then after awhile of not using links they'll be "pushed" off your favorites list, but can easily be recalled by hitting an arrow at the bottom of your favorites list. Kinda annoying if you have alot of links you visit like once a week, but it is kinda another work around for those 2 evil folders.
EDIT: The correct name of the option is "Enable Personalized Favorites Menu"