Some further investigation reveals the following:
5. CrystalReportViewer object is also used in the solution and loaded up with 2 reports on 2 tabs. The Temp report copies that the report engine creates are located in the user's AppData folder "c:\Users\UserName\AppData\Local\Temp\34\". When closing down the ReportViewer object, the first report's temp files are all deleted and the ReportViewer hangs while trying to close the last report. This indicates to me that there is NOT a permissions issue with the Temp files.
6. This is happening with the ReportEngine object AND the ReportViewer object.
7. This may NOT be Terminal Server (TS) related, but OS related.
Running out of ideas...it really looks to be a Crystal Report Engine issue.