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Source: Microsoft Support
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You may notice that when a process is started within a session running on a Terminal Server (TS) in Application Mode, the home folder of the user might be searched under following conditions:
· If the process needs to load a DLL which is not local to the .exe or in system directories but in the path,
· A TS Home Folder on the network is specified for the user, the search for the DLL also goes to the network location of the TS home folder.
This will happen if the process needs to load a DLL file which is not local to the .exe or in system directories path. If the user has a TS home folder on the network specified for the user, the search for the DLL will also search the network location of the user’s TS Home folder.
“GetWindowsDirectory” API returns on TS in application mode the \windows folder which points to a network share when a TS Home folder is set in users AD properties.
Workaround for non-TS aware applications - depending on application behavior - might be to set a Flags value: "Do not substitute user Windows directory": 0x00000400 as per KB186498
If an application uses the GetWindowsDirectory API to query the Windows directory path, Terminal Server returns the user's home directory.
For more information see the following Microsoft Knowledge base article:
186498 Terminal Server application integration information
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