Sorry for reviving an old thread, but seems like nobody ever found the solution to this problem, and this might be of interest to people who get the same problem in the future:
I had the same bug as the OP's (mouse works fine, but cursor is invisible) while playing Celtic Tales. The strange thing was it was working fine until today when I tried to open it with vdms launchpad. At first I thought it had something to do with launchpad, but after uninstalling and reinstalling a bunch of times it was obvious that wasn't the case.
Then I remembered that just this morning I had changed the language settings for XP from English to Japanese. So I tried reverting back to English, having tried everything else that could have affected the program since the day before... and oddly enough, it worked! Out of curiousity, I tried changing back to the Japanese setting and, surely enough, after another reboot, the cursor once again disappeared.
In short: If you get this problem, try changing the "Language for non-Unicode programs" to English(Canada) under the Advanced tab of the Regional and Language Options menu of your control panel. I have no idea if it's just theJapanese setting that's causing problem (which kinda makes sense in a twisted sort of way since KOEI is Japanese, and I assume CT was originally in Japanese as well) or if other languages are also affected, however.
Of course, I could just be lucky and this could be another bug that just happens to share the same characteristics of the OP's. Still, it's worth a shot.