Does /dev/mouse exist? It is usually a sim link. But you should really use /dev/input/mice Here is my input section for X:
Option "Protocol" "IMPS/2"
Option "Device" "/dev/input/mice"
And another question is does your mouse work when you use something like live-slax? If you don't have it go here:
Download and burn it to a CD and you will have a system on cd that will allow you to fix any problem with your system and test things like the mouse.
Also is there any error messages in the log file. I don't know what X.org calls their log file but it will be in /var/log/