I swore that Google Desktop used to provide a means for setting it to search the desktop by default, instead of the web. Jess confirmed this for me. He's running version 5.1.0707 and I'm running version 5.7.0712. I guess they decided to take this feature away for some reason. Jess found the option on the 'Display' tab of the desktop preferences. But the option isn't there for me.
I decided to jump into the registry to see if anything jumped out at me. Sure enough, something did. The key HKEY_CURRENT_USER\Software\Google\Google Desktop\Deskbar has REG_SZ setting for "search_type." The value was "Search Web" and I changed it to "Search Desktop." This immediately went into effect and I am now searching my desktop by default from the deskbar.