Turn off your logging while you run your test. Having all of your virtual users competing for write access to the local disk is turning your local disk subsystem into the bottleneck for your entire test. Recommended setting: Log on error.
Per your core question on temporary internet files. As LoadRunner is not going through your browser it does not use the temporary internet files download location to store files. Instead it goes to the temporary directory created in the area defined by your temp environment variable into individual log files for each of your virtual users.
I note from your previous posts that you are moving into a new role, coming from automated functional testing with QTP to LoadRunner. In addition to training, TCS should have you working with a mentor for your first 3-4 performance engagements. Your mentor should be able to assist you with these process and tool architecture issues as you come up to speed in a performance capacity. If your employer has neither sent you to training with a credentialed HP instructor using HP standard training material nor provided you with a mentor as a part of your professional development as a performance tester/engineer, then you would be wise to question their commitment to a quality deliverable in this space.