How is the [TargetDir] setting determined

The $(TargetDir) property gets set on line 158 of Microsoft.Common.targets, which lives in your .NET Framework 2.0 directory. The value of TargetDir is computed as the full absolute path of whatever you specify as the Output Path for your project, which is stored in the OutputPath property directly in your project file (.CSPROJ, .VBPROJ, etc.).

Hope this helps.

--Rajeev