No, I'm pretty sure that the Live (aka remote) Debugging section works with C#. It's just replay debugging that doesn't work with C#. I don't 100% remember, but the blog post I wrote a while ago when I did remember ( http://blogs.vmware.com/workstation/2008/04/using-the-vmwar.html ) seems to indicate C# is supported.
That said, it definitely could be an issue that you have multiple startup projects. Earlier you had said you had multiple target executables, but I didn't know that multiple were set as the startup projects. I'm pretty sure that we only support 1 startup project, but I'm not sure what the behavior is when you have more than 1 (e.g. failure, or just using the first one in the list). Try just going to 1 startup project and see if that means that you can debug. But I agree that the error message should be better.