The cache directory allows a mechanism for redirecting file writes to more relavant location. Some examples:
Running an application from CDROM that tries to write to the application directory
By adding the name of the file to your thinstall project, marking the file as "Cache on Write" and then setting the cache directory to a writable location - you permit the applicaiton to run from CDROM where it might have otherwise failed.
Some locations where you can set the Cache Directory:
%TEMP% - The system Temporary directory. This should always point to a location on the hard drive where the user has write permission. Files placed at this location may be cleaned up by the system from time to time, so persistent data should use one of the alternatives below.
%AppData%\%BaseName%
%App Data% = C:\Documents and Settings\USERNAME\Application Data
%BaseName% = The name of your EXE