I have set up a server 2008R2 VM as a kms host. I installed the product key using slmgr.vbs -ipk and then -ato. I installed the KMS_B Key, which is correct to activate other servers running server 2008R2 Standard. Slmgr.vbs -dli correctly shows the kms service as being enabled and licensed. The record is created properly on the DNS Servers. When I try to activate a server 2008R2 machine, it reads "Error 0xc004f074 The software licensing server reported that the computer could not be activated, the Key Management Service <kms> is unavailable. The KMS count does not go up on the host.

Solved the problem. It appears the MS requires a server 2008R2 KMS host must be on physical machine, not a VMware Virtual Machine. This is an annoyance to say the least as we are moving to a primarily virtual environment.