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Can a .net C# web service cause performance on the web server that it is is located on?

If so what are the most likely causes?

returned records are sent via xml and are few in numbers.

Perfomance issues could be caused by ANYTHING. Have you checked task manager, or the system logs on the server in question?
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Performance could be a problem becuase of other programs running on the serer as well. SO\\\o you need to run some diagonistics on your server to figure out the problem. Running a sniffer tool like Fiddler might help too.
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