@ 43yoGT5fan:
I had a similar problem when I first got my GT3. The instructions actually tell you not to activate PS3 mode in the XMB but I don't know why. Sometimes when I would first turn it on it would do what you describe in the XMB, I don't remember what it did in-game but it wouldn't work when it started like that. At the time I solved the problem by turning the wheel on and waiting for it to start up before plugging in the USB cable. Eventually the problem seemed to go away, no idea why. These days I leave it plugged in, but power it up after loading GT5 and never have a problem.
Their support does seem to really like having videos but they are actually pretty helpful, it just takes a long time to talk via email half-way around the world. I had some problems with mine, they repaired it, but something else went wrong with it soon. Sent it back and they gave me a new one and the old one back.
Not sure how your 2 year warranty ran out in under 2 months.
