Have you installed the vmware tools on your virtual machine?
select your machine on the inventory, and on the right select to install the tools, then go into the console. You should see the installer start up. The tools improve various features including the mouse and video.
Yes, tools are installed.
Its a dual processor, quad core host system, as well, so the client should have no processor hog - Ive given it 1Gb of memory too
A couple of thoughts. Increase the video memory in the VMX file. I think 128MB is the max. It won't help the Vista performace rating, but Vista seems to assume a video card with a "decent" amount of RAM. So try 64MB or 128MB.
And if you have the VM set for dual proc, reduce it to one CPU.