Both mouse and keyboard were not recognized in my converted Vmware VM in XP. I finally went into the Systems Hardware settings in Windows by using the keyboard after activating the keyboard under Parallels USB device settings for the VM to get to it. I found down the list several keyboards listed that were yellowed out. I uninstalled them, rebooted, let the system find the existing hardware during bootup and everything now works, I swear. Make sure you go uncheck the USB settings to activate the keyboard and mouse only in the VM after restarting.
