You may be missing a registry key.
I am going to attach a text file. You need to Download it. Then rename it. Change the name from exp.txt
to exp.reg That will make it a registry file.
Double click to enter into the registry. See if that helps.
Special Note: The attached registry file is not for use if you have Internet Explorer 5.5. (If you have IE 5.5, you need to verify your version of browseui.dll)
It will work for any other version IE. The only cure for the grayed out Folders Panel found so far has been to change your IE version.
Additional note: If you have Win2k, NT, or XP, please see this thread:
http://forums.techguy.org/t113867/s.html
Anyone who needs help, just ask.