Hello!
I am running Fallout 1 in VMware Fusion. Everything seems to work just fine except for the cursor. The sensitivity is insanely high. I have tried going into Windows setup and slowing it down but it doesnt seem to help. Any suggestions? Thanks!

The resolution patch might be able to fix this.
http://www.nma-fallout.com/forum/dload.php?action=file&file_id=1169
it has settings within ddraw.ini that you can use to edit mouse functions and I believe it has an option for mouse sensitivity.

I just solved this on my VMware Workstation by uninstalling the VMware tools mouse driver and using the default Windows driver. I also had to turn down the pointer speed in the Control Panel.

Only if you reinstall the drivers. I don't know how VMware works, but in VirtualBox you can activate and deactivate the mousefunction with right STRG+H and so on.
With the resolution of 640x480px it is not possible to let the mouse move out of the screen, as far as I could find out. (Or you will have this mega mousespeed.)
Do you use Linux or why are you using Fallout with WMware? If you use Linux, try wine.. it works better than a virtual machine.