Windows

Possibly the Existing user had a mandatory profile? Check Control Panel, System Icon, User Profiles.
What ever, go to User manger, and create a new profile for user2, go to Profile Button. Use the %username% variable e.g. \\server\profile(s)\%username% profile(s) is an existing folder THAT HAS BEEN SHARED.

Check your permissions on the workstation the user is trying to log on to. Start by deleting the users profile folder under C:\winnt\profiles Check the permissions, a good default here is
Domain admins - full control
domain users - add & ReadCreator\Owner - Full Control
don't replace permissions through the subdirectories
Now when the user logs on it should create the folder with no problem. If you are still having issues try bumping domain users to change and make sure the user logging on is in that group.

Good Luck!

Check that the new user has admin rights to the LOCAL MACHINE. And then check the profiles directory permissions on server..

I would recommend to look if the Defualt User directory exists. I do believe that when NT attempts to create new profile it copies the default user to it, and if it can't find it returns to logon box.

Hope it works.