Just to clarify the problem raj0213 is having: are you trying to delete the 'favorites' folder or just one of the items / sub-folders inside the favorites folder? For example, XP doesn't allow deletion of the 'links' folder which resides inside the 'favorites' folder.
I've got a similiar problem that I haven't solved. I'm also running Server 2003 SP2 and XP Pro SP3 on the clients.
Starting today, many (but not all) of the user's roaming profiles could not load and the problem seemed to be a specific .url link in the users individual 'favorites/links/xyz.url' folder - with an error that access was denied.
In short, I've verified all the share level and NTFS security settings are correct and then decided to give up and just delete the offending .url link - but I couldn't and was given the error 'access denied'
I was logged into the server as THE admin and took ownership as the admin and I can delete any other .url link in the folder, just not this specific link.
And it is nothing fancy either - it is the 'customize links.url' link. But when the roaming profile cannot copy that one single file to the local profile, the whole thing is aborted and I get a temporary profile - so it is really screwing up everything.
I'll take any ideas.
Thanks!