> introduce LTS (for 20) at the very beginning.
> 1. A browser, most probably Opera
> 2. Mail Client: any decent one

I have to admit that I'm a lazy adminstrator;
I'd use one of the P166 boxes to be the LTSP server itself,
with the browser, a basic window manager and similar on there.
This provides a baseline useful non-development environment
for when the big machine is not accepting XDMCP login sessions.

> The software which the devs would be using:
> 3. Java IDE: either Forte4J or JBuilder
> 4. Servlet Engine: Tomcat 4
> 5. Either Openoffice or MS Office (using Crossover office, or 
> inside VMWare)
> 6. Oracle 9i (only one instance for all the devs)
> 7. VMWare: Every dev would be having 64MB VM

These are the programs that you're likely to do upgrades
and patches against, potentially making them unavailable
until you revert back to the prior version to think about it.
The machine will also need the browser and a nice window manager.

> Tyan Tiger MPX Motherboard + 2 X Athlon MP 1800+
> 1-1.5 GB of DDR RAM
> RAID Array
> 100Mbps Switched network

That should be plenty for 10 users, might be tight for 20.
However, it would be easy enough to add another stick of memory.

> As far as the RAID array is concerned, I was thinking of RAID 
> 10 (4 disks 
> of around 18/36 GB each). The issue is that are SCSI (10K 
> rpm) disks a must 
> or would IDE disks (7200 rpm) do?

It comes down to whether the users are mostly using the same files.
For example, for the VMWare sessions, are they using completely
independent filesystem images, or are they using the same baseline
drive snapshot and only keeping local changes with respect to it.
If independent, I'd go for the fastest drives available.

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