No – AD is not necessary. You can create local user accounts. Although, if the users have accounts in AD why would you want to manage separate credentials for this term server?
It sounds like you are asking if you specifically need to use the AD tools on this terminal server. No you do not. You can put the AD tools on this server if you want but they are not required there to manage users who already have AD accounts. If this is not already on a network with AD then it would benefit you and your users from the management aspect to install and use AD, yes. Believe me managing users is a lot easier and more organized with AD.
There are a lot of advantages to using Active directory. For starters it provides a great deal more organized and more easily managed structure for proving security and user rights. Here is a good tutorial which should give you many more benefits and good explanations.