I would think about RMA it too, but if another mouse doesn't work on your system, then it is most likely your system.
Have you try the mouse with another computer? BTW, no need to install driver to test it, it should track just right without it.
If it's working in another computer, I would try to boot from a Linux-CD to see if it works. If it works there, it is probably your Windows, if not, somethings wrong with the hardware of your system (maybe a short in the USB, a front panel badly connected, etc)