The new thing about Xen, is that unlike VMware, it can do this efficiently (like IBM's VM) on commodity processors (unlike IBM's VM).Andrew, although VMWare's overhead is more than Xen's, it's still pretty good. I believe the rule of thumb is ~15-20%, so maybe your 3Ghz Xeon behaves like a 2Ghz Xeon. Not a difference that should really matter if you're not running at the limit of the machine.
For real world experience, I deployed half of my projects last year into VMs on client's sites. These were decent size intranet apps (100s or 1000s of users). It worked great -- often I found out late in the project that the machine I was remote'ing into was a VM.
The only issues encountered with the rollouts were developer inflicted. 😊
Anyway, here's a great article contrasting the different approaches:
http://www.computerworld.com/hardwaretopics/hardware/server/story/0,10801,101243,00.html
