Do you have the "hid", "usbhid" and "ff_memless" kernel modules loaded. I use a Logitech wireless mouse on my laptop. Grep'ing lsmod for 'hid' returned this modules.
Try using a different USB port. My wireless dongle works better on the left than the right hand side. One port may be better able to supply the power needed to the dongle.
For comparison, this is what the xorg.conf section looks like for my wireless mouse.
Code:
Section "InputDevice"
Driver "evdev"
Identifier "Mouse[1]"
Option "HWHEELRelativeAxisButtons" "7 6"
Option "InputFashion" "Mouse"
Option "Name" "Logitech VX Nano Laser Mouse"
Option "Pass" "3"
Option "Vendor" "Sysp"
Option "evBits" "+1-2"
Option "keyBits" "~272-287"
Option "relBits" "~0-2 ~6 ~8"
EndSection
Sometimes removing a device and reinstalling it it can help.
Since you did change Lilo, check your lilo.conf file. Some kernel options such as noacpi can cause some hardware not to function. Often because it can't receive an interupt.