Physical and Virtual.
The answer I got from Microsoft was interesting to say the least. I assumed that the 35 licenses we have would allow for 35 physical server with two physical processors and 70 VM's (Server OSE's). At least that the way I read it, apparently I was wrong.
1 Physical 2 CPU Server (License = 1 Server ML Standard)
2 Virtual Server OSE's (License = Covered under 1 Server ML as VM's)
No, you need three, the server OSE are not covered under the Server ML.
*facepalm* What?!?! But...but...but... begin 30 minute debate over verbiage in System Center 2012 R2 Licensing Datasheet.
Q: So where is the SKU for a System Center 2012 R2 Client ML for Server OSE's?
A: Unfortunately there is no such SKU, but we will mention it to the team that deals with licensing.
So now I have resorted to sending pictures, with direct snippets from the Datasheet. Who knows if they will change their tune. I give this about a 2% of positive resolution. I am going to lose, I just need to learn how to accept it with some dignity.