It sounds like the terminal server is not a domain member - either it's never been joined, or something went wrong during the process. Check My Computer > Properties under the Computer Name tab to see if it is a member. If not, you can join it from there. When you're joining a server to an SBS domain, it's not as important to use the ConnectComputer wizard as when you're joining a client. Make sure the terminal server is only using the SBS server for DNS before trying to join the domain, though.
If it already appears to be a domain member, you may need to remove it from the domain (by switching it back to a workgroup) and rejoin it.