My understanding from reading past forum postings is that LTSP has been discouraged because the type of end user applications you'd run with it (Gnome/KDE, OpenOffice, Evolution etc.) are inherently less secure than esmith's recommended mail/web/dns/dhcp/proxy servers and it'd be a real bad idea to run them on a firewall machine where they can be attacked.
However, User Mode Linux should be able to bind itself to your local NIC, which means only computers on your LAN could access it and your end-user apps would be protected from the outside world. Also, if the apps are unstable or crash, UML should be able to protect your server box from
So you'd in effect have a protected server that you could use for various X applications ,,,
I'd just like to hear from someone who's tried it out. If not, I'll see if I can get it going in VMWare