With Vista this was a one click operation: Just click on New and it was a Folder - now it's a two step process.
I'll have to use @sharks comment and click on that button to create a new folder.
Microsoft needed to be careful not to cause us to use *more* steps to get the same job done in Windows 7 vs Vista. They missed the mark on this one. I'd at least want the option to remove all the menu items in the pop up because I only want to select a folder, right mouse click and then select New Folder and not have another sub menu to go through.
While the button at the top is a one click solution, it causes me extra work because after I select my folder I have to move my mouse up and click on the button - again, keeping the mouse pointer on the selected folder and doing a right click and immediate selection is preferred (in my opinion).
I'll always consider this to be a step backwards in Windows 7 over Vista.
But thanks to everyone for helping me. Overall, so far I like Windows 7 over Vista.