Another area of consideration for the physical server is the network interfaces. In many cases setting these up may be as simple as using one or two network interface controllers (NICs) to support the entire virtual-server environment, but if your ethernet switch allows for link bonding, or link aggregation, it's a good time to take advantage of that feature and thus increase the bandwidth available to your virtual servers. By bonding two or more gigabit network interfaces, you create a larger virtual network interface that can support greater bandwidth to users and to other physical servers elsewhere on the network. Many midrange ethernet switches support this feature, so take a look at what you have to determine if this approach is viable.
Lacking any form of link aggregation, you may find that you need to dedicate a network interface to a very busy virtual server, which can be done--but in that case you may quickly run out of physical interfaces to use. Thankfully, gigabit network interfaces are relatively cheap, so if you think you might need to take this step, it's best to plan ahead and build a server with at least four gigabit network interfaces.
The final question concerns power supplies. Generally speaking, you can always build out a server with a single power supply; but if you're going to be running quite a few virtual servers on a single host, you might want to invest in the redundant power supply option. Virtualization at this level is necessarily a matter of placing several eggs in one basket, so beefing up the stability of that basket can only help in the long run. This step is not a requirement, but if the budget exists, it's a worthwhile option.
With this foundation of at least one multicore CPU, a significant amount of RAM, and a RAID 5 or RAID 6 array of local disks, you will have built a robust small-environment virtualization host server. So, what software will it run?
You have several free choices to look at, especially for a proof-of-concept or an initial foray into the virtualization world. VMware offers a free product in VMware Server, which runs on top of Windows or Linux. This isn't a "bare-metal" hypervisor in that it relies on the underlying operating system to provide key requirements for normal operation. Since this method is several steps removed from the hardware itself, it isn't as fast or fluid as other types of hypervisor, but it is usually easy to install and use. For a completely cost-free approach, installing Linux on the server and running the Linux version of VMware Server may be an option. Otherwise, installing a licensed copy of Windows Server 2003 or 2008 on the server and running the Windows version of VMware Server is another alternative.
VMware also has a free, bare-metal hypervisor, VMware ESXi. This powerful product is built on the same baseline as VMware's larger, expensive offerings and provides stable and responsive virtualization, but it has some constraints as to the hardware it can run on. VMware has a hardware-compatibility list that you should adhere to when buying or building a virtualization host server if you plan to use ESXi; if VMware ESXi doesn't have a driver for certain hardware in the host system, it may function poorly or not at all.
Microsoft's Hyper-V is yet another virtualization alternative, and it may be a comfortable fit for highly Windows-oriented networks. It's available as a server role in Windows Server 2008 R2, or as a free standalone version called Hyper-V Server. If the virtual servers that will run on the host are Windows Server 2008 as well, you may find the licensing attractive. Purchasing one copy of Windows Server 2008 R2 permits up to four virtual Windows Server 2008 servers running on that copy of Windows, for the price of a single license. If you're looking to move to Windows Server 2008--or are already there--choosing this product may be a good financial move.
You'll encounter other virtualization options as well, such as Citrix's XenServer. The free version has a significant amount of features that may not be in VMware's free offerings, such as multiserver management. XenServer isn't as mainstream as the others, but it's a viable option, it can be downloaded and installed for free, and it does not require an underlying OS or OS license.
The beauty of virtualization is that you have room to experiment, and can take advantage of virtualization features such as virtual-server snapshots, which capture a point-in-time status of a virtual server and save it. Should a problem occur later on, you can roll back to that snapshot, upon which the server reverts to the previously known good state. This feature is especially helpful when you're applying software updates and fixes that may have unintended consequences.
With a relatively cheap physical server, you could try out several virtualization packages for free before deciding on one. In fact, you may be able to use a multicore desktop system at first, before buying any hardware; just make sure it has plenty of RAM.
No matter what your decision, once you begin virtualizing even a small number of servers, you'll wonder how you ever lived without it.