Virtualize Servers

Not unless you have backup hardware handy and ready to be deployed on a moment's notice. Single points of failure are what in the industry call "Bad Things". source

You certainly want physical separation between the development and the production servers. You shouldn't ever have to worry that something you do in dev could bring down the machine on which production is hosted. And, there are some problems in development that really require either a hard reset of the physical machine or a ludicrous work-around to avoid a hard reset. As for production web server and production database, you're not really introducing any new points of failure by virtualizing them on the same machine, particularly if you can colocate a static version of the site on another server. For any modern web site of even moderate complexity, database failure is web site failure anyway. source

You obviously have experience in Linux, so why not use Xen? Use the Dom0 as the fileserver and virtualize the rest of the servers. source

I am planning to virtualize two servers where the bulk of network traffic will be between just these servers. Will I see a substantial benefit by configuring an internal network between the virtual machines, and only letting traffic destined for clients out via the bridged adapter? I plan to use either VMWare ESXi or Hyper-V as the hypervisor and Windows Server 2008 as the guest OS. Is it even possible to set up the servers this way? If the servers see two paths between each other, how can I configure them to use the internal network in one case, and a bridged adapter in another? Is it even worth trying to do this, or would the configuration complexity eventually come back to hurt me? I can see how it might cause problems if one of the servers is moved to a different VM host. source

Efficiency is another one, most non virtuized servers only use a fraction of their hardware resources. Virtualizing allows you to make better use of your hardware while still keeping things isolated. This allows companies to reduce the total number of physical servers. source