Applications that are run over a Terminal Server connection are actually executed on the server itself not on the client machine. This means that all of the Terminal Server client connections share the server's hardware and software resources. For example, two users are both connected to the same server through Terminal Server. If the users are both running Microsoft Word, two copies (instances) of Word are started on the server, each operating under a different user context based on the login. This could potentially cause some performance issues. Below is a list of areas that contribute to performance issues.

Users not logging off: Users who simply close the terminal connection do not log off of the system. System resources are not released until the user logs off. One of the effects of not logging off is slower performance because of the limited resource pool availability. If the user logs off properly and does not simply close the connection, all processes associated with that user are terminated and the memory is released.
Users contend for CPU time: As stated above, all users running the same application via Terminal Server are competing for the central CPU resources available on that server. Based on the number of applications being executed simultaneously and the performance of those applications, the other connected users may be negatively affected by poor performance.
Users Contend for Disk Access: The input and output demands made using Terminal Server are greater than the standard connection to a server. This is because users compete for resources opening the same applications, but they also compete for server operating system disk accesses, such as DLLs.
Users Contend for RAM: Memory resources are used from the same pool on the server. Even though each user has an independent session of Terminal Server running on their client machine, the RAM resources are still being pulled from the server. Note that users should only run applications that are necessary. If they open several applications, they will reduce the performance of other users connected to the server.
Users Contend for Network Access: Network efficiency is critical for the success of Terminal Server. As with all network-based systems, the network provides the communication between the server and the client. However, an efficient network is even more important for a Terminal Server due to the amount of desktop activity actually being performed on the server itself.
Users Contend for Server-Side Hardware Components: Competing for hardware resources is not normally an issue in a typical client/server environment. However, with the use of Terminal Server, the hardware is not client-based. Therefore requesting the use of any hardware potentially causes a competition with others making similar requests.

Windows Server 2008 R2 and up includes the Windows System Resource Manager, which is intended to alleviate some of these issues. More information can be found at http://technet.microsoft.com/en-us/library/cc755056.aspx.

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