while playing i have terrible mouse stuttering and lockup issues which make the game unplayable and really frustrating.
i have updated my graphics card drivers, my direct x, my mouse drivers and nothing has fixed this, the rest of the game runs fine and smooth my only issue is with the mouse

Check this post:
http://www.gog.com/en/forum/star_wolves/does_star_wolves_work_on_win_7_64_bit/post6

Minor things of note: you need to reboot your machine after installing the old DirectX package, and at least for me the game only runs in Win98/ME compatibility mode (CTDs at the menu screen otherwise).

Also check this post for a widescreen fix:
http://www.gog.com/en/forum/star_wolves/widescreen_works_with_cfg_and_ini_changes/post1

Same problem here!

Win7 on a pretty good quad core machine. Game performance is terrible though it works ok.

I thought it was a multicore issue and set cpu affinity, but that is not the problem.

Can anyone point out the DirectX version supposed to work with this game?

Gee, that sucks. As a general rule, I have found multi-core issues cause problems with a lot of these games (as in older games), and resetting the affinity often solves the problem. As far as the DirectX version, I have been using 9c, but I also have XP on my gaming computer, so it may be a Win 7 issue....