Well, yes, actually I do plan to move all the music to an external hard drive and remove a lot of the redundancy in the OS default pathnames. I guess my motivation for using the OS default path for music was really to backup all "my" stuff (as opposed to programs and OS), all I would have to do is backup "My Documents" (I would even configure programs that put data under C:/Program Files/ to put it in "My Documents" instead.
With Vista, it's a little cleaner, and c:/Users/Shahrukh now gets everything including application data, etc.
But now that media (especially with video) is taking so much more disk space than real documents, I've changed my backup and storage strategy entirely and indeed will have most media on external drives.
As far as Alex's and Matt's proposed solution to my current problem on using Library Tools, yes, I realized that that was an option (and you've confirmed the mechanics of how I would do it ... thanks!). I guess the curious part of me was just wondering why this Vista junction virtualization thing wasn't working the way I thought it was supposed to. But it's probably cleaner to use the more straightforward library global replace feature rather than some hard-to-understand backward compatibility "feature" in Vista.