If you open %TEMP% from the Start menu, it may open C:\Users\username\AppData\Local\Temp\1, C:\Users\username\AppData\Local\Temp\2, and so on. Each time the user logs off and back on, the number increments. The number resets after each reboot. Why are we seeing these folders being created under Temp? What would cause the operating system to create these folders?
The problem lay in the group policy(Run->gpedit.msc)
for Windows XP: Computer Configuration\Administrative Templates\Windows Components\Terminal Services\Temporary folders
for Windows 7 or Windows Server 2008 R2: Computer Configuration\Administrative Templates\Windows Components\Remote Desktop Services\Remote Desltop Session Host\Temporary folders
If you don't select Do not use temporary folders per session, then these TEMP subdirectories are created. There is also a knowledge base article describing the registry keys behind these group policies.
The corresponding registry keys are as following:
HKEY_LOCAL_MACHINE\System\CurrentControlSet\Control\Terminal Server
Type: REG_DWORD
Data value: 0x1 Enabled
Data value: 0x0 Disabled
Default data value: 0x1 Enabled
Deletes session-created temporary folders at logoff.
IdleWinStationPoolCount
Type: REG_DWORD
Data value: 0x2 Two Idle Sessions
Data value: 0x1 One Idle Sessions
Data value: 0x0 Zero Idle Sessions
Default data value: 0x2 Application Server
Default data value: 0x0 Remote Administration Server
The number of idle RDP sessions to maintain.
PerSessionTempDir
Type: REG_DWORD
Data value: 0x1 Enabled
Data value: 0x0 Disabled
Default data value: 0x1 Enabled
Use a unique temporary folder for each session.
ProductVersion
Type: REG_SZ
Data value: 5.0
Default data value: 5.0
Indicates the version of Terminal Services (not configurable).
TSAppCompat
Type: REG_DWORD
Data value: 0x1 Application Server
Data value: 0x0 Remote Administration Server
Default data value: 0x1 Application Server
Default data value: 0x0 Remote Administration Server
Uses Application Compatibility mode or not.
TSEnabled
Type: REG_DWORD
Data value: 0x1 Enabled
Data value: 0x0 Disabled
Indicates whether Terminal Services is enabled or not.
FlatTempDir
Type: REG_SZ
Data value: 0x1 Enabled
Data value: 0x0 Disabled
Default data value: 0x0 Disabled
Specifies whether or not a flat temporary folder will be used.