OK, I got the SpaceNavigator to work in SolidWorks.
1. My company recently purchased and employed the SolidWorks PDM Enterprise software. I discovered that when I open a part file through this program (double click on the file in the windows explorer like interface) it would open in Solidworks and the SpaceNavigator would function.
2. If I opened SW2010 from my desktop shortcut or start menu, the SN would not function.
3. Your clue to the privileges (permissions) helped. With my IT support we tried a couple changes to permissions with no luck (start menu SW folder). Then I tried right click on the SolidWorks executable file under program files, chose properties, Security tab, edit permissions, Users - "Full control" check box and now when I open SW, the SpaceNavigator works perfect.
4. We believe that the PDM software has a built in function that sets permission levels automatically when SolidWorks is started through it. This may explain why the SN worked in that scenario.
I am not sure how to check or change the "3Dxware driver" permissions settings but it is working now. Hopefully this helps you and others. Thank you for the assistance. I am looking forward to the expanded functionality of this interface device.