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My understanding is that for a SharePoint 2010 installation running one web front server and one database server, that both servers need to be fully licensed for SharePoint, other Standard or Enterprise.

The reason for this seems to be that any server running SharePoint services requires a full SharePoint license.

In practice, how does this work? How does the license get installed on the database server. What happens if the database remains unlicensed by SharePoint?

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I don't think you need extra SharePoint licence for database server.

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So if this link is relevant you need SP licences only for Front-Ends and Application Servers (IMO this makes sense).

Some other useful links:

Disclaimer: Since I am developer this part of licencing is only one I really know :)

Servers in a development/test environment are an exception, as they are typically covered by MSDN licensing.

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That is correct. The only exception would be if you are running Reporting Service in integration mode, then you would have SharePoint installed alongside the SQL instance hosting the report server. –  Jesus Shelby Sep 20 '11 at 20:44
    
@JesusShelby Really? Can Foundation be enough? msdn.microsoft.com/en-us/library/bb510781.aspx - I was looking at Two-Computer Deployment and I see that only SP object model is needed. (I think I need to talk to collegue responsible for licencing to put me up-to-date on this issues) –  Vedran Rasol Sep 20 '11 at 21:02
    
you have to add the report server to the farm, so if the farm is on foundation, than yes, otherwise it will require standard or enterprise. msdn.microsoft.com/en-us/library/bb283190.aspx –  Jesus Shelby Sep 21 '11 at 3:32
    
From the link above "When using SharePoint Server 2010 for Internet Sites to license external-facing scenarios, you need a license on all servers that will be used for external content, regardless of farm configuration or if users are directly accessing the server (staging, application, front-end, or index)." Vague language, but they do not specifically mention the database. Funny thing is, my contention is supported by a Microsoft rep! –  mmcglynn Sep 21 '11 at 18:02
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