For us Mac users who are Windows neophytes, could you give us some kind of benchmark for what constitutes excessive paging? I can see the numbers of "Reads in" and "Writes out" in Activity Monitor but have no idea what these mean.
Sure thing. The best tool for diagnosing paging is the human ear. The next best tool is the drive activity light (physical and/or virtual). OSs have a set amount of physical RAM and they simulate additional RAM as virtual memory using large files on the hard disk (this has nothing to do with OS virtualization, BTW). Windows calls these files paging files (C:\pagefile.sys) and OS X & Linux call them swapfiles. OSs move a lot of data around as they service running apps and their own internal processes. They prefer to do this in physical RAM, which is about 1000x faster than virtual memory, but if they become starved for RAM they have no choice but to dip into the virtual memory pool. That means the hard drive starts chugging away and performance plummets. Paging (host or guest) will manifest itself audibly and persistently, as well as visibly if you have a drive light. If you're not a Windows geek or a general OS 'under-the-hood' guy, Task Manager/Activity Monitor-based diagnostics might be more confusing than enlightening. Stick with sound & sight at first.
Many Mac users have little or no experience with Windows, but are in the position of needing to run one or three Windows apps. While I prefer to avoid rules of thumb for scenarios as complex as running one OS under another via virtualizatiuon, I'll toss a few out there in the hope that some folks might benefit (I'm primarily targeting Mac users who want to run XP under Parallels).
1) Multi-core CPUs make for a much nicer virtualization experience than single-core CPUs.
2) Think 2 GB of physical RAM, minimum, and don't be stingy with your virtualized OS. Windows wants 512 - 768 MB even for moderate workloads. Having said that, a well-cared-for XP setup can handle hardcore software development tasks with only 1 GB. I see a lot of folks here running Parallels on Macs with 1 GB RAM and allocating 256 MB to XP. That's just not going to work out very well in most cases. RAM, RAM, RAM. And did I mention RAM?

Both XP and OS X have an insatiable appetite for it. If they're both on the same hard drive and you starve one, you starve them both, since they both become I/O-bound.
3) Stick with the basics. Use virtualized XP to run those special apps you need to run. Avoid Webcams, Coherence, drag & drop, etc. if you experience problems with any of them. Virtualization has been a key aspect of my professional life for 5-6 years and I believe that less is more. The newer features will stabilize over time and I applaud Parallels for introducing several of them, but for now, venture there only if you're prepared to deal with potential problems.
BTW - my description glosses over many details about how demand-paged OSs (most modern OSs that we encounter) deal with memory, but hopefully it illustrates how OS performance can plummet when it doesn't have enough physical RAM.
Given that many (most?) Intel Macs are dual-core, my advice to Mac folks is to boost your RAM to 2 GB and give XP 768 MB to start. You can then try lowering or upping that number until you hit a sweet spot for your own scenario. It also helps a lot to disable the XP 'glitz' (Control Panel -> System -> Advanced tab -> Performance button). Configure it for best performance).