My next web server

I think I'm long past due replacing my current web server with something more capable and powerful. While my current server does its job well, I'd like to expand it's roles and for that, I need beefier hardware. Currently, I am considering using virtualization to provide virtual servers for everything I need, rather than exposing the "bare-metal" to the internet. Right now I'm not completely sure on what hypervisor/virtualization software to use, but will most likely use something from VMware, specifically, VMware Server or VMware ESXi, both of which are free. There's also Xen and KVM to consider.

There are several advantages to using virtual "appliances", the biggest for me being:

• Security - Each service is contained within it's own VM, security breaches are thus limited. The physical hardware is protected because it is not exposed directly to the internet.
• Portability - VMs are easy to migrate from one machine to another. With some software, it is even possible to do so live (with the OS running).
• Backups - Backing up a VM is as simple as performing a snapshot of its current configuration. No more messing with scripts to backup databases and web folders.

My current server has no problem hosting 2 live VMs, so the hardware requirements aren't too bad. I could use old parts I've got, but to get the most out of it, better hardware is needed. I expect a $500 hardware budget is reasonable.