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 .

The corresponding registry keys are as following:

HKEY_LOCAL_MACHINE\System\CurrentControlSet\Control\Terminal Server

 

DeleteTempDirsOnExit

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.