I had the same problem - new Gutsy 7.10 install a day or so old.

I noticed today that my Desktop folder was now located in $HOME/.Trash
though I can't explain how/why it got there - possibly my heavy-
handedness deleting stuff in my home folder.

Used sudo mv to shift it back again ok, and that's when I found that the
desktop was acting as if desktop_is_home_dir was set true (it wasn't).

Editing user-dirs.dirs  as above will hopefully fix it for me.

-- 
files from ~ shown on desktop (desktop_is_home_dir == false)
https://bugs.launchpad.net/bugs/154037
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