Eric,
I am running production SharePoint 2003 ON A VIRTUAL sql 2000 server and many other production databases on virtual SQL 2005 server. So far I have no issues. First thing, did you split the app server and database server on separate VM? This is recommended even in physical environment. Also, for the production sql server I have my storage on SAN, are you using SAN or local drives on esx host. I have several virtual disks seating on different LUNs, c: OS, D SQL, E: systems DBs, F: prod DBs just mdf files and g: Transactions logs. I am using 3GB memory with no reservation, So far absolutely no issue with performance
Also, how big is your user community? I have about 700 users who access SharePoint on a busy day. Also, some time you get better though pout if keep the app server and DB server on same ESX host, this way network traffic doesn't go out the production switch.
Please let me know if it is working for you. I have absolutely no issues.