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From LilyPad settings try disabling "Start with mouse focus" and "Always Hide Cursor"
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Both of them are already left blank in pad settings and the cursor problem still occurs.
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Hmm...those are just random idea now.
1.Config=>Emulation Settings=>GS Window=>disable both vsync options
2.Try using the default mouse cursor(if you are not using it)
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Both vsync options are not enabled, and I'm currently using default mouse cursor.
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Hmm,no idea then,it works fine here...in fact the mouse cursor is always visible(over the game window while game is running(window and full screen mode)and it stays visible when I press Esc