Show Desktop in Windows Vista and Windows 7 hides Outlook on the Desktop as well. How can I fix this?

Unfortunately, there is no way to fix this.  Microsoft decided to strip this functionality from Windows Vista and above.  However, there is a trick that still works:

Hold the "Windows Key" and press M to minimize all windows.  It will minimize everything except Outlook on the Desktop, essentially achieving the same effect as Show Desktop.  "Windows Key" + Shift + M will restore your minimized windows.