I agree with @womble and @Nixphoe: You have a bunch of questions here. I'll hit some high points, though, because a few stick out.
Should you backup more of the user's profile? That depends on whether or not it's necessary for business. (Generally I say "yes", but then I always use Roaming User Profiles anyway). Simple folder redirection of user folders won't "overload" the server computer in terms of the type of metrics (CPU, RAM, primarily) that would affect its ability to be a viable Terminal Server machine. Having said that, though, it seems like you're putting a few too many "eggs" in one basket if that server will be your DC and your Terminal Server. It's generally not a good idea (read: really bad idea) to use a DC as a Terminal Server machine.
I like to be able to completely restore the user's profile environment from backup. I think it makes for happier users.
I don't see anything about retention windows in your post. You need to figure out how the data needs backup and what kind of retention window you need. This is especially important if you're going to use physical media for an off-site storage component. (You do need an off-site storage component of some kind.)
For such a small environment you might look into the backup functionality in Windows Home Server 2011 for protecting the configuration of individual PCs. I haven't used the 2011 version of the product but the 2003 version was really pretty slick (providing a versioned, de-duplicated block-level store for client computer backups).
I've been pretty cold on the idea of "bare metal restore to VM" applications because, as of yet, I haven't seen one that really worked well. It's fundamentally a "P2V" problem and, frankly, I always find P2V'd machines to be crufty and messy (not unlike machines with "upgraded" versions of OS's).
Bringing back Active Directory, in particular, seems to be something that backup app vendors have difficulty with. I'd invest in a more "traditional" file-level backup mechanism that you know you can restore from combined with a secondary domain controller and a good System State backup of the DC to catch Active Directory.
The built-in Windows Server Backup, in terms of bare-metal restore to the same hardware, actually works very well. Restoring to unlike hardware has been and continues to be a sore point and I'd like to see Microsoft work on that in future Windows versions.
I haven't used any "free as in freedom" backup software on Windows and can't comment on it. I've found both Microsoft Data Protection Manager and Symantec Backup Exec to be good products, but there are licensing costs associated with both. Your time spent configuring and testing (you are going to do a full test restore, right?) a no-cost solution should be a factor in the selection process.
