Windows 7, (and introduced in Vista), utilises Junction Points. These are like shortcuts which point to different folders within Windows 7.

For example, Documents and Settings no longer exist, and the user folders inside them, eg folders "My Documents, My Pictures, My Music" etc also no longer exist in Vista or Windows 7, and have been replaced by "Public" folders for Documents, Pictures, Music and so on. However older pre-Vista software still needs the XP type My Documents folders for installation and setting up, so both Vista and W7 have these shortcuts in the User profiles that point to the Public folders.

If you use Windows Explorer to navigate to C:\Users\Public\Public Music and so on, you should be able to create new sub-folders there.

With the Desktop is a similar story. The Users\Desktop folder is just a shortcut to C:\Users\Public\Public Desktop and you may find your missing files and icons there.

Does that help?