It appears I do not understand how to make GPO work.

I have a Terminal Server (Win2003) setup that allows users to log in (authentication comes from a Mac OSX LDAP/Open Dir PDC). This works beautifully. I have managed to make GPO open IE7, go to my specific website (thanks to vera_noest's for that tip), and upon exiting, quit the Connection.

I did not realize that each person logging in was making a username folder in the "Documents and Settings" folder. We do not want this. I would like for the user folders to be deleted after logout or even have them connect with out even making a folder, just use a temp folder that can be cleared out. (Yes, this terminal server is only providing a Mac user with IE7 for 1 website, nothing else so there is no need to save any user data)
I do not have the luxury of Active Directory so I am assuming my solution has to come from GPO

Can anyone point me in the right direction?

You cannot prevent the creation of the local profile. Each user always has a local profile, whether they log on to their workstation or the TS.

But you can remove the locally stored profile by creating a roaming profile on a network share, and then delete the locally cached copy when they log off.

Both of these 2 tasks can be done with a GPO. You'll find the settings here:

Computer Configuration - Administrative templates - Windows Components - Terminal Services
"Set path for TS roaming profiles"

Computer Configuration - Administrative Templates - System - User profiles
"Delete cached copies of roaming profiles"

You write that you don't have AD, so I assume that you mean the Terminal Server's local policy?

Another approach is to use local profiles and to delete them once a week in an automated script, using the Delprof.exe utility from the Windows 2003 Resource Kit. You will probably have to reboot the server before you can delete the profiles, so you must ensure that nobody is logged on at the time the script is running. You can schedule the script with the Task Scheduler.