Yes you need to install and activate a Terminal Licencing server on your network (since the server is not part of a domain, this should be on the server itself; it's a Windows Component) and install a CAL license pack (5x per-user)
You forgot to mention what OS the server is running (windows 2000/2003/2008?)
Here's an abstract of the how-to: http://support.microsoft.com/kb/823313
Any special reason the server is not member of a domain? It's difficult to do a good security lockdown on the machine if you can't use AD Group Policy,,,,,