Thank you for your post. I encountered the same issue with my Win2k8 x64 host running 3 win2k3 32bit VMs. Your post helped me resolve the issue immediately. I hope someone from VMWare is aware (no pun) of this issue.
It's amazing to me how bad this upgrade screwed things up. I've been working on fixes for three days. Anyway, the referenced KB article helped me out as well. Thanks Ron!