Bopanna I G,
thank you for this update.
Setting the VM's memory to 1024 MB means that the wired memory of my Mac - the "red" part of the memory graph in Activity Monitor's memory view - is now at 1.65 GB, with "active memory" (the yellow portion indicating active programs) at 274 Mbyte. Parallels itself is apparently eating up a little more 600 MB of wired memory. I'm running the VM on one processor. There is no memory requirement difference between the settings "Optimise for Mac OS X applications" vs "Optimise for the VM" that I can choose from in the VM settings (in Options). In Parallels 4, choosing "Optimise for Mac OS X applications" would cause a lot less memory being required by Parallels (as pre-caching was effectively turned off as far as I understand). It feels as if Parallels were always optimised for the VM, regardless of the setting.
The quality of sound and the playability of games has not improved with 1024 Mbyte assigned to the VM. I'm very fond of Warhammer 40,000 (not "II", but rather the old game from 2004) which ran very well in Parallels 4 under the Win 7 Release Candidate with 768 k memory. It runs, but not well, in Parallels 5, regardless of whether I assign 512, 768, or 1024 Mbyte to the VM. Even the sound in Icewind Dale, an ancient game in the Baldur's Gate series from around the turn of the millenium, has sound issues.
When I'm using the VM for a while (Word, Powerpoint, IE, maybe Media Player) switching to the Mac takes about 5 minutes in which I hear the hard disk working constantly. To me this sounds and feels like the Mac's virtual memory is extensively used.
In all other respects Parallels is certainly behaving as advertised. I love the product, I just guess there are a few kinks that need ironing out.