Which OS are you running on the server?
Windows 2000: Control Panel - Add/Remove programs - Add/Remove
Windows components - Terminal Services - check "Application Server
mode"
Windows 2003: Control Panel - Add/Remove programs - Add/Remove
Windows components - Terminal Services (which implies Application
server mode)
SBS2003: this is not possible.
Note that running TS in Application mode also requires a TS Licensing
Server and TS CALs for every client that connects.