This is an issue with Microsoft Windows Installer and does not affect all Windows 2008/2003 systems. The problem can occur when the original install path from the older version of VMware Tools is invalid, such as if the install path was E:\and that path is no longer present. For more information, see the Microsoft Knowledge Base article (555175).
To correct this issue, you must perform a forced uninstall and reinstall of VMware Tools.
To uninstall and reinstall VMware Tools:
Right-click on the virtual machine.
Click Guest > Install/Upgrade VMware Tools.
Open a Console to the virtual machine and log into the guest operating system.
Click Start > Run, type cmd, and click OK to open a command prompt in Windows.
Change the drive to your CD-ROM drive (For example, D:\).
Type setup /c and press Enter to force removal of all registry entries and delete the old version of VMware Tools.
Note: For 64-bit guest operating systems, type setup64 /c
Open My Computer and double-click the CD-ROM that contains VMware Tools.
After Auto-Run starts, follow the prompts to install.
Note: This must be done from the GUI interface. Do not launch the install by running Setup from the Command Prompt. Also ensure that the CD-ROM is enabled. In the virtual machine properties select CD-ROM under Device Status, and ensure that Connected (if the virtual machine is powered on) and Connect at power on are selected.
When the installation is complete, reboot the guest operating system.
Based on VMware KB 1012693