I wouldn't worry about the application issue as much as the security risks involved in allowing your users to TS into the desktop of your DC. I would definitely apply a group policy to restrict access to only those applications they need. See Q278295 for details on locking down a W2K terminal server.
Some applications install differently for use on a terminal server; once the server is switched over to an application terminal server, you will need to put it in install mode prior to loading your applications. This is why applications installed prior to the change may not work properly after switching to application mode. Once you've switched to application mode, if you add the programs through Windows Add/remove programs in control panel, it automatically put the server in install mode. Otherwise, you will need to type "change user /install" from a command prompt. If you've already installed end user applications on the server, I would uninstall them, then reinstall after changing your TS mode.
Again, I would need a very, very compelling reason to convert a DC to an application terminal server...
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