It will work fine, as long as it is your authoritative DHCP server on your VLAN/LAN. I have it running on an ESXi server, alongside a load of other VMs. I have allocated it the following for ~15 users: 4GB RAM, 4 Cores across 2 sockets.
As long as you're using at least a 100Mb/s network (We use GbE), you should see a smooth experience. All works just as well as using a local machine, give or take some frames here and there. Just a forewarning, stay away from Google Chrome, and Chromium. They are awful to use with LTSP, you must deploy them as local apps as a fat-thin client solution, which isn't compatible with the Pi. The reasoning for this is that Chrome makes too many calls to the X server, and this causes horrible performance, you'll literally be watching chrome refresh, like loading an image over dialup.
In this case, the Raspberry Pi is an LDM client. More information is available on Wikipedia, and the LTSP wiki. Edubuntu also has good resources on LTSP, as it is integrated into the Distro!