Don't connect the tx and rx
Even though it shouldn't matter, the cable has no series resistors on its I/O's. I would plug it into your PC, open the device in hyperterminal (or another terminal) *then* connect the Tx to Rx.
A while ago I read through the datasheet to work out why it was crashing my machine (turns out I was drawing >200mA from the bus) and I thought I had blown the Tx pin by shorting it to ground. It wasn't the case. All the I/O pins are tristated until the device is opened by the host PC. That is to say, if you plug it into your PC, its asleep until you open the comm port it's been assigned to.
Before then, all I/O pins are tristated, and it doesn't matter how much power you draw from the bus. As soon as you open the device, I 'think' it runs a quick check...which determines if everything is 'ok' then it opens successfully. I reckon linking the tx/rx pins for loopback before opening the device makes it poo itself
The cable itself is basic, and nothing much can go wrong. But the Prolific chip can behave quite oddly in certain situations.... no where near as friendly as the FTDI chips. Any situation other than connected to a RS232 level shifter or a standard UART and it seems to misbehave.
Out of interest, I'll try and recreate the error. I've had it before when I've opened the comm port whilst its been connected to certain circuits.
Blueteeth
Edit, I'm using XP SP2 (not SP3)