VS Code Extension 2026.x — Files No Longer Written to Disk (VFS Change Breaks AI Tool Integration)

Environment

• PowerShell Universal Server: 2026.2.0
• VS Code Extension: 2026.2.x (previous: 5.6.x)
• OS: Windows 11

Description
After updating the VS Code extension from 5.6.x to 2026.2.x we noticed a breaking change in how script files are handled locally.
Previous behavior (≤5.6.x): The extension fetched scripts from the PSU server via REST API and wrote them as real files to: %AppData%\Local\Temp\.universal.code.script\
This allowed external tools (file watchers, AI coding assistants, search tools) to discover, read, and update the files on disk.
Current behavior (2026.x): The extension now uses VS Code's Virtual File System (VFS) API. Files are served in-memory and are never written to disk. The temp folder is no longer populated.
Impact
This change breaks the integration with AI coding assistants such as Claude Code (and likely GitHub Copilot Workspace, Cursor, etc.). These tools rely on real file paths to:

• Discover and index scripts
• Read file contents for analysis
• Write changes back automatically

With the VFS approach, the AI tool cannot find the files, cannot read them, and cannot apply suggested edits directly — the round-trip has to go through manual copy-paste.
Additionally, the previous workflow of "edit in VS Code → test on DEV server" was instant. With VFS-only files, any change now requires an additional Git sync cycle to get the file onto the DEV server, which significantly increases iteration time.
Request / Question

1. Is there a setting in the new extension to re-enable writing files to a local temp path (similar to the old "Local Editing" option from v1.8.0)?
2. If not, is there a recommended integration pattern for AI coding tools with PSU 2026.x?
3. Would you consider adding an option to mirror the VFS to a configurable local directory so that external tools can interact with the files normally?