IBM came back with a workaround to my problem,….All workarounds have been tested and work.
The workarounds then for anyone running ESX 3.5 Build 64607 on HS21 XM 7995 v1.08 with 2 x quad core CPUs:
1. Use ESXi instead (No service console, hence no PSOD. Also no mouse services in the console needed, hence no PSOD (this is the problem that I was experiencing).
2. Use ESX 3.5 Up 1 Build 82663 (Stable as of 18th April – double check your checksums!)
3. Use ESX 3.5 build 64607 but disable the gpm module, do this by entering the following on the Service Console:
chkconfig gpm off
then reboot the host, obviously you will get a PSOD but reset it and all should be well thereafter.