What hardware upgrade do you recommend, if it is needed at all? And software recommendation? It currently has little over 90Mb RAM, 2Gb HD running OS 8.5.
For email I'd use http://www.stalker.com/CommuniGatePro/ which is think has a free version and for DNS I'd use products from mice and men but they're quite expensive.
Your current hardware should be fine to run both of these programs.
I got AppleShare IP latest version, not sure of the number, from MacResQ. It includes file, mail and web servers. It seems to be extremely slow as a file server, however. Maybe I don't have enough RAM, I don't have as much as you.