LTSP Hardware Requirements
Quite an interesting topic and much can be said about it. Basically, it comes down to using cheap clients and heavy servers. But what clients are suitable and how heavy do the servers need to be?
If you like, you can reuse almost every piece of old hardware you can find, as long as it boots from the network. Really old stuff uses the Etherboot method. More recent hardware is mostly supplied with PXE boot capabilities. If not available you can just add a PXE-capable network card or put the bootrom on a bootable CD or hard disk. Rom-o-matic is your friend.
Besides turning your normal PC's to thin clients its possible to buy special thin client computers. These are diskless, low-end machines which are pretty small, quiet, and much cheaper than a normal PC. You can buy them in many places, from white label to big vendors as HP.
233MHz with 48MB ram. 2MB video ram.
400Mhz with 128MB ram and PXE boot capabilities.
LTSP is quite scalable; in case of capacity expansion you can simply place an extra server next to the current one. Whether to build a big server or a several smaller ones is up to you.
This mostly depends on the applications and use cases you decide upon.
Memory Because of the way shared memory works it will use less memory if everyone uses the same applications. Likewise some applications might eat more memory than others. In general you need around 256MB for the system and 128MB per user if they use office applications and a web browser. It's wise to have some extra memory capacity, since running out of memory could have major consequences. Extra memory will be used by the Linux kernel for caching, which speeds up overall performance.
Processors Processor speed depends highly upon the use case. If you use CPU-hungry applications you might need a little more; Flash uses large amounts of CPU time, for example. Fortunately, the thin clients stay responsive even if a small group of users try to hog all of the CPU time (unless the load becomes extremely high).
Disks It's advisable to use some form of RAID in the terminal servers. Besides saving your data when a single disks fails, it improves the performance (especially read performance, which is the most important here). Since there will be considerable disk activity, the system might become slow if you don't use a RAID setup.
Similarly, it's advisable to buy SATA disks with NQC (Native Command Queueing) and a 16MB cache (or similar). These disks are very affordable at the moment and offer great performance benefits for terminal servers.
If you have more than 10 users, it is recommended to use gigabit ethernet for your LTSP servers. Although normal usage ranges from 0.5 to 2mbit, clients can peak quite high (70mbit), especially when watching multimedia content.