Tested on my ubuntu 8.10
I found it in 
http://cutecomputer.wordpress.com/2007/01/03/howto-copy-paste-between-local-and-remote-desktop/

Go to the Window Server's Services , select Auto and start the below 3 services.
1. Network DDE DSDM 
2. Network DDE 
3. ClipBook

and back to your Linux PC Terminal Server Client , connect using RDP
only.

-- 
Terminal Server Client isn't able to copy to/from clipboard
https://bugs.launchpad.net/bugs/94743
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