The navigation pane in Windows 7 lists Libraries as a separate category by default, as in the picture below:
In some systems, Libraries may be listed under Desktop, and users may be wondering why it’s listed so all of a sudden, or think it may be due to inadvertent dragging of Desktop icon over Libraries or vice-versa. It’s not so. There is a simple (but overlooked) setting for the navigation pane where in you can choose to show all folders or not.