If you have the home folder defined in the active directory object of the user, and you do not want that home folder to be set inside the Terminal Services you have to overrule the setting by setting a Termminal Services home Folder.
Now this is not the big news, and is even common knowledge for the Windows System administrator. But yet there is one litle pitfall I would like to warn you about, in which you may fall when defining a Terminal Services home folder.
When you are defining the location to where you want to redirect the TS home folder to, be sure to create the location manually. If you do not, you will find that your TS home folder setting isn't working.
Also, setting the TS home folder to a local location on the server will actually not show the drive letter assigned to it. This along with hidding the drive(s), will actually stop the user from using the TS home folder (as they can't see the folder).