I assume you are using the NT Terminal Server without the Citrix add-on.
With Citrix you have to do something else.
See the MS KB:
Article ID: Q192522
How to Make Client Local Drive Available to Terminal Server
SUMMARY
When a client is logged on to a Terminal Server, the local drives of the computer from which he or she is connecting are not available. This article describes how to make a client's local drives available, while logged on as a client, to Microsoft Windows NT TerminalServer.
MORE INFORMATION
You can use the following steps to make the client's local drives available to them while he or she is logged on to Windows Terminal Server:
On the client's computer, go to the root of the drive you want to make available. Create a new share. Assign permissions only to the user whom you want to have access to the data.
Log the user on to the Windows Terminal Server, and then use the "Map Network Drive" option from Windows NT Explorer to connect theshared local drive.
Now the local drive will be available to the user while that user is logged on to the Terminal Server Client.
regards,
Leopold