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You need to benchmark and measure. Every situation is different.
If you are constantly running at high CPU utilization, you need more horsepower.
If you are constantly running out of memory/swapping, you need more memory. If your database performance is poor due to high utilization and small memory cache, you need more memory.
If your Internet connection is saturated, or saturated at certain times of the day, then you need more bandwidth.
If you don't KNOW how much CPU, memory, bandwidth you are using, how on earth can we answer this for you?
Why are you running a server on a T1 in your office? (I presume it is in your office.) Is there some good reason this isn't co-located in a data center?
As far as "power" goes, I would go with multiple cores over the very highest clock rate. With dual-core chips overflowing the supply channels, I wouldn't build a webserver today with a single-core CPU. And memory is cheap enough that there needn't really be a tradeoff. Pay attention to the MAXIMUM memory capacity and get what you think is reasonable. You can always add more later, and it will be cheaper than it is today.
One of the reasons for the upgrade: We do get high utilization of CPU from time to time (more accurate data after compiling the banchmarks).
The reason we host the server in the university is mainly budget. Looking back 5 years (this is when we got a pair of servers for the web - IIS and SQL) compared to dedicated hosting, we saved a lot. We had the T1 line already in place. We probably need to get some quotes again. In the last 5 years the hardware down time was neglectatble. The T1 line uptime was also on an average very hight. We probably had handful of outages per year.
One of the reasons for my post was that a server manufacturer, given the data I posted, came back with very high performance and expansive server (2 quad core, 4gb ram, 2X150GB 15K hard drives). It does seem over kill for what we need. This server configuration is at least 8 times more on CPU and Memory then what we have. So even if we double the bandwidth, I do not think this power will be utilized.
For sure we will get 1 or 2 dual core chips. I would agree with you that memory is not expansive. I am still debating should we go with 2, 3 or 4 GB?
You've got close to 20x times the performance. Quad cores? Those ate arguably the the bleeding edge of performance - and that ususally demands a premium.
With the rig described above, you're good for the next five years or so...