I am new to Terminal services and am working on a small deployment of some XPe thin clients to replace aging machines. We have a small domain so I am running Server 2008 with terminal server and the license server on the same machine. Other machines, including the DC, are Server 2003. Everything in the server manager seems fine, the licenses installed ok and all 24 are available. I have Per User CALs and the license server is in Per User mode. There are no problems being reported by the License manager and it sees the locally installed license server fine. The server added the Terminal server license group to the domain fine. I have it set for forest discovery, but being on the local machine it hasn't had a problem finding itself yet.

When I connect to the server it reports a Event ID:1004 Cannot issue a client license. The client connects and doesn't show any errors. The client does however get what looks to be a console type session and can see the server manager and administration tools. So instead of an error they are just remoting the server desktop it looks like. Due to permissions they can't do anything but run their programs, so a client can't administer the server.

I have been digging around to find a solution and have come up empty handed so far. I have checked the registry and the licensing server is there. The server is part of the licensing server group.

It seems to be similar to this problem.
http://support.microsoft.com/kb/884570/en-us
Being Server 2008 though I don't think the hotfix should be, or would be, applicable.

Maybe you guys have some ideas?
Thanks

Update: I tried Reactivating the license server in case my CALs were corrupted, but I still have the same problem.