A Terminal Server can be put in two modes:
In Windows 2003, a server should automatically be put in to install mode if your installation software has setup, or install in their file name. In Windows 2000, you have to put the server in the correct mode, by installing software using Add/remove programs in the Windows control panel. Note that in Windows 2003, if your installation files don't have those keywords in them, you need to use the Windows 2000 method anyway.
There is also an alternative way to switch modes on a TS, and that is through the command line:
Put a server into install mode before each installation of any bit of software.
CHANGE USER /INSTALL
After the installation, put the server back into execute mode. You have to put it back there, regardless if the installation was succesfully, or failed utterly.
CHANGE USER /EXECUTE
If you're uncertain about which mode you're actually in, you can check its status:
CHANGE USER /QUERY