This was caused by a .Net 3 SP2 patch (from last patch Tuesday) that appears to break the vSphere client. I did NOT appear to have problems with the vSphere client from my Windows 7 workstations, but a customer of ours reported problems with Windows XP SP3 and Server 2003:
If you’ve already installed the .NET 3 patch, then uninstall KB980773 to fix.
Here's a discussion about the issue:
http://communities.vmware.com/message/1549684Also ¿ vSphere 4.0 Update 2 released yesterday (along with an update for ESXi, vCenter Server, Update Manager, and Consolidated Backup. I have NOT verified yet if the vSphere client included in Update 2 fixes the problem with the .NET patch