XP does not follow the policy, nor the local settings.
it does cache some network drives even though it's been denied to do so.
and, also, the places where it does this, it's not even same that you can find when you search MS or internet.

XP has something screwed up pretty bad in the cached files system (believe, been experiencing this with multiple machines as well as others) and currently there seems to be no cure.

so, if we talking about XP, I say same as others would say for win9x:
format c:
install proper OS.
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