Hi Linda,
The jazz.net article Best practices for configuring and tuning LQE should address many of your questions related to sizing. The mechanics of building reports in Report Builder is pretty much the same whether you are using DW or LQE as a data source. In terms of running reports, they should also run pretty much like DW-based reports - depending of course on the complexity of your query and the size of the results set. It's definitely intended to be the same type of interactive experience as Report Builder reports against the DW.

You might also look at the LQE-DW decision tree to help you with your decision. Note that it's not necessarily either-or; you could conceivably use both, although that does require more resources than using only one or the other. One area I'd suggest you look at is historical trend reports: using the DW, there are many out-of-the-box trend reports, especially for work items. LQE supports a much smaller number of trends. If you there are particular reports that you want and that aren't currently available in LQE, please open an RFE to request them.

In terms of Report Builder vs other reporting tools - were you thinking of a specific tool? Report Builder is intended for interactive reports that can be run directly or added to a dashboard, with table or graph output. For document-style reports, for example that reproduce a DNG module structure or flow, you'd use something like Rational Publishing Engine (RPE), which also allows more control over formatting and ability to combine results from different reports and different formats (you can export from Report Builder to RPE). There are still some legacy BIRT reports shipped with the CLM solution, but we are focusing more now on Jazz Reporting Service and Report Builder for interactive reporting.

Hope that helps.