If you install the latest version of Google Desktop for Windows, you'll notice a new dialog that presents a list of features and lets you select the ones you want. Google Desktop enables by default the sidebar with gadgets, but the search feature is limited to filenames. To actually search the full content of your files, you need to enable the "enhanced search".
This is a strange choice, considering that Google Desktop was built for this "enhanced search", which is now disabled by default. Here's the description of the application when Google launched it, in October 2004:
"Google Inc. today announced a beta desktop search application that enables users to search their email, files, web history, and chats. Called Google Desktop Search, this new application makes it possible for users to find information on their computers as fast and easily as they can search the web with Google."
The desktop search application added gadgets in the subsequent versions and was renamed to Google Desktop. "Google Desktop is a new, easier way to get information – even without searching. You can think of it as a personal web assistant that learns about your habits and interests to identify and present web pages, news stories, and photos that it thinks you will be interested in," explained Marissa Mayer the shift.
Maybe performance was the main cause for disabling search, or maybe users didn't think it was very useful. You can still enable the search feature both when you install the application and in the settings, but not everyone will discover it. I recommended Google's software to someone who needed a tool for searching his documents and I was surprised to hear that the software didn't work as advertised: obviously, Google Desktop didn't index any file.