Adding item to the Desktop context menu in Windows

Answer 1

There's a series of articles on CodeProject that details writing Shell Extensions and is very good:

http://www.codeproject.com/KB/shell/shellextguide1.aspx

Answer 2

Such a handler must be registered in HKCR\Directory\Background, instead of usual locations like HKCR\Directory, HKCR\Folder, etc.

Check out Creating Shell Extension Handlers in MSDN.