We started using VMware server for virtualization running CentOS 5 as host and CentOS 5 and other operating systems as guests. The servers were Dell PowerEdge 2950s with 4 SAS disks in RAID-10 setup.
However, performance was really poor especially for I/O intensive applications. After browsing around a bit I did the following:

1. Change I/O scheduler (host and guest)
   echo deadline > /sys/block/sda/queue/scheduler
2. Increase disk read-ahead (host and guest)
   /sbin/blockdev –setra 32768 /dev/sda
3. Set size of /dev/shm on host server to same as memory size on server (8 GB) via
   mount -o remount,size=8G /dev/shm
   And adding an entry in /etc/fstab for it to be set up on boot-time as well
   tmpfs              /dev/shm           tmpfs   defaults,size=8G  0 0
4. And then add some configuration options to the .vmx files (restart of virtual machines needed after the change):
   mem.ShareScanTotal=0
   mem.ShareScanVM=0
   mem.ShareScanThreshold=4096
   sched.mem.maxmemctl=0
   sched.mem.pshare.enable = “FALSE”
   mainMem.useNamedFile = “FALSE”
   MemTrimRate = “0″
   MemAllowAutoScaleDown = “FALSE”

This indeed the trick. Performance increased significantly!

Specifically I/O intensive operations does not affect the host server and all virtual machines as previously.