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I can't even select anything from the menu, the mouse or keyboard doesn't work at all. Is it joystick only or is something wrong with my download? I'm on W8.
It's a bug in Dosbox (I think), just press some keys/buttons a couple of times and you should be able to regain control of the mouse.
Although I don't have Red Baron on GOG, I have more games that have this bug, Aces of the Pacific and Aces over Europe by the same creators has it too and Wing Commander has a similar issue.
I think it has to do something where mouse and joystick can both be used to control the cursor.