I would lean towards VMware.
For a small environment, VMware has a package for at most 3 ESX Hosts can be part of a cluster to be the new home of your environment and grow as needed.
I would get this package and utilize 2 physical hosts to provide redudancy and high availability despite any hardware failures. In your situation, that physical server hosting that application would be down. With VMware with HA/DRS, your application would be available on another physical server.
1) 2 Physical Servers (Dell would be the least expensive) or utilize existing as long as they are identical (memory and cpu in particular)
2) Hardware-based iSCSI SAN (Dell offers some packages that you can consider)
Software-based iSCSI SAN (something like this: http://www.starwindsoftware.com/free)