How come when you add a site - it does not create a directory

OK.. I add a new site --- I have it setup as a sub-domain install.

Shouldn't it be creating a directory? it is not?

Where do I upload my images and so forth to? If i upload into the themes upload file in the main site -- then every persons images using that theme would be in the same file?? I am confused on how this is suppossed to work