I doubt a scratched CD will be the problem. If a CD is scratched, then the system will have problems reading the disc during the installation. If it really can't read it, it will report an error.
I am assuming this IS a legitamite copy of windows!
If I didn't know better, I'd suggest that installing SP2 may solve the issue but as you've already done this, I'd be wrong! It is possible that an update of a slightly different type may be required though. You said you had this problem originally but it went away. This suggests that it's probably not a hardware issue then but it could be a driver issue.
i.e the thing that caused the problem to stop last time may have been a driver update. As you have just done a fresh installation of windows, then you won't have updated any drivers yet. It could also be a windows update (other than SP2 obviously) that's needed.
Did you have Automatic Updates enabled last time? If so, then it could be down to a windows update that you may not even have realised had been installed last time.
Did you update any other drivers? I know you said you updated the video card driver. Did the problem with the mouse stop after you updated the video card driver by any chance?
Edited by Samm, 23 August 2007 - 03:29 PM.