I have bmouse setup and i have been messsing with the sensitivity options but i just cant find a good setting.

when aiming i overshoot or undershoot because of the *lag*. it feels as if vsync is on but i cant find vsync option anywhere. when i move the mouse left or right it takes like a second for caleb to move

Is there a way to fix it?

That sounds really odd. Do you have the same problem when you run the game without BMOUSE?

I'm having a similar problem in bMouse- not quite lag, but it's as if the mouse deadzone is extremely high.

I haven't experienced any "input lag". Maybe it has to do with the DOSBox settings? You might try changing cpu cycles by pressing Ctrl+F11 to lower or Ctrl+F12 to increase them (See here for additional information). Though, if the game otherwise runs smoothly that might not help. From my experience that's "normal" behaviour of the game in DOSBox. To me it also feels like a "high deadzone" on the y-axis of the mouse, whereas the x-axis feels rather fine. Using bmouse may or may not have improved it slightly, but I couldn't be sure.

I've looked into the issue a bit but didn't find any solution. What you can try, though, is going into the advanced mouse settings and changing the y-axis scale. (Use the "Launch Settings" shortcut in the game's folder, there go to Controller Setup->Setup Advanced Control Options->Advanced Mouse Setup->Mouse Y Axis Scale). This effectively let's you change the y-axis sensitivity, as the in-game sensitivity slider only influences the x-axis.
Other than that what I found was only that the Build Engine games all have a rather bad implementation of mouselook and the best chance is using a source port. BoodGDX seems to be coming along nicely and is already well playable, so that may be an alternative for some.

Hopefully someone has a magic solution for the DOS version up their sleeve, but otherwise I guess you just have to get accustomed to it. At least I don't find it so bad after having played it for a while.

I think i fixed it. I changed output=svga_s3 to output=Vesa-nolfb and the mouse feels ALOT better.

I think its because of vsync. I noticed changing it to that option forced vsync off because now I have tearing.

It was not lag like ping lag but more of a input lag. It felt like smoothing or enhanced pointer was turned on.

I had this issue too and after looking into it I ended up writing my own version of bMouse with a workaround for it. I do not think it relates to any input lag but rather that Blood divides the Y axis input by a very large number and as a result you need to jerk your mouse pretty fast to cause a change in that direction so yes it's a deadzone of sorts. Strangely the game appears to compensate for this by skipping pixels for the vertical movement but I have no solution for that.

Here's my implementation: www.dropbox.com/s/cycgjsx58db6vjb/smouse.zip?dl=0
It can be used as a drop-in replacement for bMouse but you might want to reset your sensitivity values to 1.0 in the setup again. It's also helpful in Redneck Rampage which has this issue as well. The zip comes with both a precompiled binary and a patch containing the source code.

Thanks for sharing your solution RWesterlund!

Unfortunately, having just tried Blood without any additional program, then with bmouse.exe, then with your smouse.exe, I hardly ever notice any difference. Most importantly, the "deadzone" is ever present and I perceive no change to that. Can this be or does this mean bmouse/smouse doesn't work properly for me?

I'm using both with the unaltered release of Blood from GOG and made sure that either program was 1) specified in the setup.exe as an external controller as well as 2) added to the dosboxBlood_single.conf file via the line "BMOUSE.EXE launch blood.exe" or the same for smouse respectively.

[edit]
Oh gosh darn it. With both bmouse.exe as well as smouse.exe I always missed setting the controller type to external, thus rendering the rest of the setup for these useless. Makes me feel stupid. Doing it now, though: Wow, that makes a world of a difference! Works much better than without it!