spent a couple of hours running this to the ground.
first we changed permission on /etc/vmware/hostd and files therein, to no effect.
next we uninstalled vmware server 2.0 and cleaned up the OS to remove all remnants thereof. Re-installed vmware server 2.0, and this time chose root as the default administrator (it was previously another user with sudoers privilges). This allowed us to add exactly one (1) user in the permissions tab for the host.
next we edited /etc/vmware/hostd/authorization.xml as described by drossgatech
This fixed it. We can now add as many groups and users in the permissions tab as we desire.
So the bug is that the "add permissions" code seems unable to increment the counter past 11, when it is at 11. Changing the counter to the correct number higher than 11 fixes the problem, and the counter then increments correctly.
my vote is for drossgatech to get credit for the correct answer, and for someone in the Server 2.0 team to have a look at the incrementing code for "new permissions"