Problem is resolved - for some reason usb.inf file was missing from c:\windows\inf folder. I am absolutely sure I've never deleted it, so there must be some bug in Windows installation.
The fix was to remove the tranceiver, copy the file from another windows 7 64 bit ent machine, reboot (just in case) and plug the receiver back in - everything passed fine, MS Arc keyboard is working fine now (I'm typing on it).
MS - you have some work to do...
Man, gotta say a big thank you for this. I had two devices this caused problems with, first was a Dell multi-media keyboard, wouldnt install at all. Then there was the Arc Mouse, using the MS Nano Transceiver. The USB.INF and USB.PNF files were missing from
C:\Windows\INF\ on 64-bit Windows 7.
Replacing these with the same files from another W7 x64 machine worked a treat.
EXCELLENT WORK eDEV!!
Ross