I spent the weekend ripping apart the lab and rebuilt my lab ESX hosts as 4.1.  I wanted to build some new templates since the old ones were a bit long in the tooth, so the first one I spun up was a Windows Server 2008 R2 VM.  I did the typical - ran through the new VM wizard, attached the ISO, installed Windows and loaded the VM Tools... all normal stuff.  But then I noticed that the mouse performance was really sluggish.  I checked all the old tricks - the Display Properties -> Troubleshooting bar... check.  Mouse shadowing... off.  Tools actually loaded... check.  Hmmm...

A quick Google (or "Bing" for the Microsoft-centric out there) revealed a few others who've seen this also.  I checked the display adapter and sure enough, I was stuck on the Standard Display Adapter...

Initially, I tried updating the driver using the normal search paths, but it kept telling me I had the proper driver - which I knew I didn't.  I manually entered the driver location using the VMware Tools driver path:

C:\Program Files\Common Files\VMware\Drivers

This updated the driver to the VMware SVGA 3D (Microsoft Corporation WDDM) driver, as seen below:

A quick reboot later and I was on my way - problem solved! Apparently this is an issue in Windows 7 and Windows Server 2008 R2 on ESX 4.1.  It was introduced with a virtual hardware update they made in this new release.  Windows Server 2003 and other Windows versions seem fine - just these.

This is a small tidbit of information, but it was quite a nuisance so I hope to help someone out there who's had this.

A Note to VMware: I must say this is pretty disappointing.  In every past version, there's never been an issue where a less than optimal driver is loaded by default.  It's not that easy tracking down why, particularly since it only happens on these two releases of Windows (that I've found this far). I would hope that this is addressed in the near future.