VIRTUAL PC AND RAM SETTINGS
Below, one of the Virtual PC (VPC) engineers explains why leaving VPC set to 256MB RAM is better than increasing the memory, even if you have the extra RAM to allocate. 256MB has always been the recommended size for Virtual Machines with Virtual PC. The reason is long and complex, but I'll try and simplify it for you.
When Windows boots up it determines the amount of physical RAM is has. When there is more than 256 MB of physical RAM it changes it's paging scheme as well as some of the caching optimizations to take advantage of the larger physical RAM.
These optimizations don't play well with Virtual PC for the Macintosh, because the physical RAM it thinks is there is actual virtual!
Because the fundamental performance bottleneck is paging memory between your Macintosh and the Windows Guest, the more memory Windows thinks it has the more it asks for. If you say you have 512 MB of physical RAM Windows XP will ask for a block of about 192 MB of RAM to use. Virtual PC then allocates that 192 MB of RAM and pages it in. This immediately gobbles up loads of memory and causes stress on your Mac and Virtual PC. If you set the RAM to 256 MB you don't see this happen.
Paging memory is slow, the more you page the slower you get. Keeping the RAM settings to 256 MB minimizes the amount of paging Windows does the majority of the time. Realize if you have 4 or 5 windows applications running in your Virtual Machine you are causing a lot of paging. The more physical RAM Windows believes it has, the more it thinks it can page information in and out.
So you have Windows paging it's applications to virtual RAM, we're paging that Virtual RAM to real RAM and you see a performance hit.