Keyboard A-Z NOT Recognized / Modifiers ARE Recognized

Very very strange...

I can not type any characters in the virtual Windows 7 machine. Alt and directions keys ARE recognized.

(For my test I start Internet Explorer, Click on the Address bar, and type away and nothing happens. If I click the "Alt" key the traditional windows menu does pop up and I can use the arrow keys to navigate the menu structure)

I am NOT using FireVault.

Mac OS: 10.7.2
Windows: 7 SP1
Parallels: Build 7.0.15052 (Revision 710728; November 11, 2011)

I have installed all of the latest BootCamp drivers. I am not using a BootCamp partition. I am using a Parallels Expandable Partition.

IF I go to Parallels -> Devices -> USB -> Apple Keyboard ... the keyboard STOPS working in OS X, but still does NOT work in Windows. Turning this OFF and it starts working in OS X, but still no typing of characters in Windows.

HELP?!?!?!