Symptoms
When Mouse Pointer Integration is enabled, the pointer moves diagonally down and right, regardless of the actual pointer movement. Sometimes the actual pointer rendered on the screen appears at the position where the host's cursor is, sometimes it appears where the guest thinks it is. Disabling "Mouse Integration" (ie, forcing the interface to capture the pointer) seems to work just fine, the pointer renders properly and works properly (can be moved in all directions).
Workaround
By disabling the "SMS Virtual Mouse" device in the Device Manager and rebooting, pointer integration started working properly again.
Suggested fix
Perhaps simply changing the VBoxMouse driver to ignore the SMS Virtual Mouse device altogether would be enough. On my system, the SMS Virtual Mouse driver has:
Manufacturer: Microsoft SMS Solutions
Driver Version: 2.50.4136.2000
Device Instance Id: ROOT/*SMS_MOUSE/0000
Hardware Ids: *SMS_MOUSE
Guest: Win XP. I don't know a lot about the "SMS" software, except that is used to push software updates to the PC and apparently has some sort of remote-control facility built in which would use this virtual mouse driver.
Host: Gentoo Linux running VirtualBox 1.5.6
