I recently bought the Microsoft Wireless Desktop 7000 keyboard/mouse combo. It is bluetooth driven and comes with a bluetooth dongle that plugs in via USB.

When I plug it in, it detects the hardware and beings a 4 step 'new device software installation'. The first 2 pass, then it comes to installing a "base system device" and fails. I do not believe it is recognizing the dongle correctly and this is where my problem sits. I can manually install the driver through device manager for "microsoft tranceiver v3.0 for bluetooth" which is what it is stickered as, but even doing this does not get it working properly.

Any help would be greatly appreciated as I am completely stumped on this. I am running Vista x64 Ultimate, I have all the latest MS software for this media package installed, and it also links to a Vista hotfix -- KB925528. When I try to install this it says "this update does not apply to your system". It's possible I have previously installed this via windows update, but if not then I don't know why it says that.

Hopefully someone can help me out here as it really sucks not being able to use the new mouse/keyboard as well as the other bluetooth devices I want to use.

Vista is great os but unfortunately has some problems with hardware compatibilities (printers,bluetooth etc). I tried jlink,trust,hp,and only hp bluetooth works fine.
Try this...
1 Download and use the best driver from manufactures website for vista 64bit,(not from the cd)
2 Update dognle firmware
3 Install the new release of SP1 (standalone or through windows update)
Please inform me if you have any good results

I went to take your advice of installing SP1 but it turns out since I made my own custom image using VLite, SP1 won't work. As a result I have to re-install vista and I think I will go back to x86.

I have the MWD 8000 bluetooth and it works perfectly with Vista Ultimate x64. Maybe it has issue with your custom image? Where does the 7000 place it's receiver? The 8000 has a powered USB hub built into the charger that sits next to the keyboard. Maybe 6 inches away max. If you have to insert the receiver into a USB port on the back of your PC, that could be a problem.

And no, I did not pay 300USD for a keyboard combo. CompUSA was selling them for 99USD when they went out of business.

Try opening Admin Tools (under Control Panel) and look at Services - look for a Bluetooth service and on Log On's check the Local System option, stop and start the service - this may solve the problem.