Profiles can be the most annoying and confusing things. As far as I can remember if there's already a local profile on the machine and a mandatory profile specified in AD, the mandatory profile is merged into the local profile at login, so any of the settings defined by the mandatory profile are enforced together with the content of the local profile.
To stop the build up of local data on the machines you will need to make sure all local profiles are cleared off the machine at logoff. There's several ways you can do this - I use the VBS script below as a start up script to clear out the documents and settings folders on XP. It's a bit crude as it still leaves traces of the profiles in the registry, but removes all the files. It was written by someone else on here I believe, but I can't recall who.
You can also try installing the userhive cleanup service and turning on the options in Group Policy to delete local profiles at logoff, although I've not had a lot of success with this. You can also run Delprof from a script which is more through but takes a while to run sometimes depending on the size of profiles it's having to delete.
On Error Resume Next
Set fso = CreateObject("Scripting.FileSystemObject")
strPath = "C:\Documents and Settings\"
userexcludelist = "Administrator,All Users,Default User,localservice,networkservice,"
Set f = fso.GetFolder(strPath)
' Loop through all subfolders
For Each fldrItem in f.SubFolders
fldrName = fldrItem.name
If Right(strPath,1) <> "\" Then
Pathfinder = strPath & "\" & fldrName
Pathfinder = strPath & fldrName
If InStr(1, userexcludelist, fldrName, 1) Then
set obtainfolder = fso.GetFolder(Pathfinder)
' Clean up objects
Set fso = Nothing
Set fc = Nothing