We have used old PCs as TS clients in a couple of different ways, with varying success.
The first method we used was Windows 98 running a pre-configured mstsc.exe instead of explorer.exe. This method was reliable, and easy to set up as the ghost image was only ~150mb. Downsides included bad USB drive support (as windows 98 driver support is, well, old) and its a bit of a pain to change the mstsc settings (gotta boot in cmd prompt, change the system.ini, then reboot, make changes, change system.ini back then reboot again).
The second option we tried was 2x Thinclient Server which has a freely downloadable version. It involves running their server application. Their application ties in with AD and runs a sql database that keeps track of the users, clients and settings, with apache/tftp for the interface and PXE booting. The clients can then boot off PXE, CD, USB drive or the hard drive. For local installs, the client can be updated remotely. The clients are linux based, and has better driver support. It takes up approx ~35mb on the workstations if a local install is done. The main downsides we have found with the system is that it uses a fair amout of resources on the PC hosting the software, and if the database dies, the clients can get a bit twitchy.