What brand of mouse do you have? If it is MS, do you have the latest version of Intellipoint?
Try unistalling Intellipoint and re-install it after a re-boot.
It is also worth checking your graphics card driver version; it is possibly conceivable that the graphics card is misrepresenting the movement. Kind of like it does if the refresh rate and graphics performance are set very low when you install Windows and the correct driver is not yet installed.
I suspect that SP2 has caused one of these items of software to be obsolete.