German language support recently did some "debugging" of WatchDirectory tasks on Terminal Server. Tasks set to run as a Windows Service didn't run properly...
He wrote a German language blogpost describing how WatchDirectory works with Windows Terminal Server. Basically, you need to make sure Terminal Server is in "Install Mode" (change user /install) when you install WatchDirectory. You already knew this, of course, it is the same for all programs you install on Terminal Server.
However, WatchDirectory and WatchFTP can also create Windows Services.... When you create (or change) a WatchDirectory/WatchFTP task so it will now run as a Windows Service (or change it from Service back to "normal") you must make sure Windows Terminal Server is running in "Install Mode", also don't forget to change back to "user mode" (change user /execute) when you're done.
More info from Microsoft is available here: Starting the installation on Terminal Server.