Well, it seems that my problem isn’t with the new version of Parallels Desktop, but with the VM image that I have upgraded, several times. A little background: my Windows XP is a licensed copy originally purchased with Virtual PC back in the PowerPC days of Mac. I imported this image into Parallels in version 2 and I have been using it in subsequent releases of the 3.0 product line without problems. It seems that the strange mouse and driver problems that I was expericing in the VM are releated to the source of my image – Virtual PC. I don’t know many specifics, but importing my VM using Parallel’s Transporter seems to have fixed the funkiness and solved my issues with drivers failing to install. I found this solution and a thread of other users expericing the same problems on the Parallels forums. Thanks to those users to contributed to this threat!