Mats-

To add what the others had said about how LTSP works: every thin client 
(eg Wyse WinTerm) that you purchase has to have some sort of operating 
system on it to operate.  This generally is just enough OS to initialize 
the hardware, initialize the graphics mode, provide a local 
configuration application, and launch a protocol client that knows how 
to connect to a server (RDP, NX, X11).  The software that is on the 
terminal is generally in some kind of flash ROM or a solid state Compact 
Flash drive.  You generally don't have to know about it, but it is there 
nonetheless.

Now imagine that instead of using a CF card inside the box to store the 
OS and client, you put that same software on a server and shared it over 
the network.  Then, all the client terminal needs to have on-board is 
enough brains to connect to that share and then boot from that share.  
As you can imagine, this has a couple of advantages:

1) You can easily update the terminal "firmware" by just updating the 
software in the share
2) Your terminals don't have to be dedicated devices, but any PC that 
can boot from that network share.
3) You can add more software to the "firmware" that can run locally on 
the terminal.

This, in a nutshell, is the primary service that LTSP provides.  By 
default, nothing runs on the terminal except the OS + drivers, and the 
graphics system (xorg, X11) which is also the network client.  You can 
choose to copy applications into the "firmware" share contained in 
/opt/ltsp/i386 and run them locally, but it is not required.  

One detail: there are actually two shares in practice: the basic kernel 
image is in a trivial ftp (tftp) share that allows PXE/etherboot to copy 
a kernel down and launch the kernel on the terminal, and then the kernel 
(which has more brains) knows how to connect to the NFS share in 
/opt/ltsp/i386.

Hope this helps,

-Todd


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