While debugging a problem that required uploading files to a website, one of the files started getting an error at the start of the upload instead of at the end.  This didn’t make sense because the problem being debugged was after the file was uploaded to the website.  This looked like another problem instead of the original problem we were hunting.   We suspected that the problem was connected to the file being uploaded instead of the website.  When we looked for the file on the Desktop it wasn’t there.  This was odd.  Went back to Internet Explorer and the file was displayed in Internet Explorer’s  file dialog.   But the file was not on the Desktop.  We tried closing Internet Explorer and restarting, but Internet Explorer still showed the phantom file. 

It turns out this is an artifact of Internet Explorer’s sandbox implementation on Vista or Windows 7.  Under certain conditions Internet Explorer writes to a virtualized Desktop folder located on the file system at: C:\Users\xxx\AppData\Local\Microsoft\Windows\Temporary Internet Files\Virtualized\C\Users\xxx\Desktop.  If you have need to move or remove the files in the “Virtualized” directory, the easiest solution is to open the file browser dialog in Internet Explorer and then move or delete the files from inside that dialog. [more]

More information is available in a article by Mark Russinovich: http://blogs.technet.com/markrussinovich/archive/2009/02/03/3174194.aspx