Using OS X Lion on an older Macbook (in my case late 2008), if you attempt to use a third party graphics driver, for example as a screen extender, you may experience a problem with dragging and dropping and other graphics related problems (VMWare not releasing your mouse).

Apple apparently fixed this issue with 10.7.2 and closed the related ticket. Alas the issue is not closed, although it is much better. There is also a temporary way to resolve the issue until the machine is rebooted.

Send the machine to sleep, and wake it back up. The related graphics problems should now stop.

I have no idea why this works, or how this works, but it does indeed work. I’m now happily using ScreenRecycler again and VMWare isn’t getting so attached to my cursor anymore.