So after playing with the 3D overlay issues in Virtual Earth, I decided to tear out the elevation data before the import.  This "fixed" the problem (see here).  In this example the map is set to 3D mode, the KML overlay is placed over the map, and my reference point (3 trails converging - click the button to the right of the map to go there) is correctly shown on the map.  This works because there is NO elevation data in the KML file, or rather it is zeroed out.  I noticed something else with the overlay issues though, check this out:

This is a screen shot of this map using this KML file after you use the control+down arrow, or the tilt button on the left-hand menu pane on it.  If you notice, in the lower right corner the altitude is given by the mouse cursor's position.  In the KML file, remember that the 3rd number in the comma-delimited string before the next space is the elevation.  Given the elevation data in the KML file, and the elevation data by the altitude display on the VE control, it is very strange that the overlay is approximately 400-500 feet above the maps elevation at every point.  What is also perplexing is that the track that is overlayed DOES seem to show elevation - i.e. it's not a flat line - there is some gradiation/relief in the overlay.