Running a server - hardware needed?

I have a some lab software that we are setting up to run on a server, with the users running clients. Prior to that each user had the software on their personal PC or laptop.

Since setting up the server, the software is running much slower than previously. The computer acting as the server is a typical Dell P4 3.4 Ghz, 2GB ram, and a 250 GB hard drive.

What upgrades are necessary to run more efficiently? The software is used by about a dozen clients.

Additionally, how could I tell if the bottleneck is more of an internet issue or a hard drive speed (file transfer) issue?

Thanks,

Javaslinger