Interesting, I have a similar problem with my Cordless trackball. All of a sudden the motion was very jerky, and eventually stopped responding. Funny thing was if I moved the PS/2 to USB adapter a little, like wiggled it, the darn thing worked. But 10 minutes later the problem reappeared.
I think my problem may be a dead battery, but I won't know til tomorrow night (will have time to go buy some AA batteries). So I'll post back then and let you know.
Outta curiousity, what's your system specs?