Why does XP create duplicate account folders?

Could be a number of things.

The profile might have been set with a domain user account that has been deleted. The user would loose access cause of a GUID mismatch.
If you log into the domain as the administrator can you assign the current user rights to that folder and associated profile?

The profile could have been corrupted also.

It could be infected with a virus. Is the system running anti-virus?

Usually this happens when a profile became corrupt, or the ntuser.dat file was missing. The next time that user logs on, it will create a new profile.
This can also happen if another user account with the same name, was logged on to the system, and then a local user was created.

From what your describing I think its because the user has logged on to the local machine with the same username and password as the domain profile.

If there was originally a domain account it will still work but the domain has to be in the drop down below the login and password. If the stupid multi-user feature is enabled then hit ctrl-alt-del a couple of times to bring up the old style of login prompt. Change to the correct domain either local or domain and log in. The local account will allways work but the PC must be connected to the domain for that account to work.

Go to the following site to get instructions on copying an account.
http://tinyurl.com/48bwr

Another possibility is that your SID got corrupted, it could have been a locally stored profile, then when the machine accessed the Network it resolved the username/password to a different SID and therefore created a new user folder locally. If it bothers you that much,
log in as administrator,
rename both accounts,
log out,
log in as user which will create a new folder hopefully with the corret SID
log out,
log in as administrator and copy the contents of both renamed folders to the newly created user folder, this will effectivly combine both 'accounts'.