Here's a problem I had a while back when setting up Ubunto in VPC 2007.  I found the fix somewhere else, but I can't remember what site to give them credit.  Who ever it was, thanks a hundred times for the info and I just wanted to break it down a little to add to the available sites the fix can be found at.

Problem:  Installed Ubunto version 7.10, kernel 2.6.22-14-generic in a Virtual PC 2007 environment.  Video was detected with no problem but the mouse recognized properly.  Tried different mouse types in configuration files but none worked.

Fix:
  To fix this problem, perform the following procedure to update the /boot/grub/menu.lst file as follows:

1. Boot the VPC 2007 Ubunto environment.
2. Log on as the user you created during the install.
3. Using the keyboard, since the mouse is not available, press ALT+F1 to open the Applications drop down menu.
4. Open a terminal window by using the arrow keys navigate to Accessories > Terminal and press the <ENTER> key.
5. In order to have permissions to write to the file, enter the following to switch user to root:
    su   -   <ENTER>
6. Backup the file by entering:
    cd  /boot/grub <ENTER>
    cp  -p  menu.lst  menu.lst.orig
7. Update the file as follows, I listed what my option looks like, yours will be slightly different.  The actual edit you are performing is appending the 'i8042.noloop' option to the end of the kernel line for the main boot option.  You'll see about 3 boot definitions at the end of the file.  Find the main one, not the recovery mode line, unless you want to add it to that one also.

FROM:
title       Ubuntu 7.10, kernel 2.6.22-14-generic
root        (hd0,0)
kernel      /boot/vmlinuz-2.6.22-14-generic root=UUID=65dd91f8-72d7-4986-b714-c76324dbf61b ro quiet splash
initrd      /boot/initrd.img-2.6.22-14-generic
quiet


TO: (Added i8042.noloop to end of the kernel line)
title       Ubuntu 7.10, kernel 2.6.22-14-generic
root        (hd0,0)
kernel      /boot/vmlinuz-2.6.22-14-generic root=UUID=65dd91f8-72d7-4986-b714-c76324dbf61b ro quiet splash i8042.noloop
initrd      /boot/initrd.img-2.6.22-14-generic
quiet


Save the file and reboot your VPC using the reboot command.  Hopefully you'll be good to go and have a working mouse in VPC for your Ubunto.  I'm sure this will be fixed in later versions of Ubunto, but right now this fix works great.  Happy Linux'ing