I am managing a few cheap servers as my user base isn't large enough to get much more powerful servers. I also don't have the money lying around to invest in a server to prepare for the larger user base. So I'm stuck with the old hardware I have.

I am toying with the idea of virtualizing all the current OS's with most likely VMware vSphere Hypervisor (AKA ESXi) Xen (ESXi has too strict of an HCL, and my hardware is too old). Big reasons for doing so:

• Ability to upgrade and scale hardware rapidly - This is most likely what I'll be doing as I distribute services, get a bigger server, centralize (electricity bills are horrible), distribute, get a bigger server, etc... Manually doing this by reinstalling the entire OS would be a big pain
• Safety from me - I've made many rookie mistakes, like doing lots of risky work on a vital production server. With a VM I can just backup the state, work on my machine, test, and revert if necessary. No worries, and no OS reinstallation
• Safety from other factors - As I scale servers might go down, and a backup VM can instantly be started.
• Various other reasons.

However the limiting factor here is hardware. And I mean very depressing hardware. The current server's run off of a Pentium 3 and 4, and have 512 MB and 768 MB RAM respectively (RAM can be upgraded soon however).

Is the Virtualization layer small enough to run itself and a Linux OS effectively? Will performance be acceptable (50% CPU overhead for every operation isn't acceptable)? Does it leave enough RAM for the Linux OS? Is this even feasible?