The size of a profile can be a serious issue in some environments. In fact, in some cases it can take up to seven or eight minutes for the users to log on when using Terminal Services. A typical profile on your local computer may be only 5MB to 6MB, but I’ve seen profiles over 150MB in size. As you may have noticed, a lot of applications (Office, Internet Explorer, etc.) cache files within the user’s profile. You may want to consider turning off the caching of Internet Explorer files to minimize the size of a user’s profile.
You can limit the size of a user’s profile through group policies on your Windows 2003 domain. Open the group policy object (e.g., Domain Security Policy) and go to User Configuration, Administrative Templates, System, User Profiles, Limit Profile Size. Set the value to something like 30MB or so for starters. Keep in mind that the size you specify is in KB, so for 30MB you will specify a size of 30,720KB. You can optionally check the box “Notify user when profile storage space is exceeded” so the user is reminded every 15 minutes (by default).
If you want to limit user profile size on a Windows XP computer in a standalone workgroup environment, you’ll find the option under a slightly different location. Go to Start, All Programs, Administrative Tools, Local Security Policy, User Configuration, Administrative Templates, System, User Profiles, Limit Profile Size.
Source: Zubair Alexander, MCSE, MCT, MCSA and Microsoft MVP