Hi! Just wanted to point out that the fix for this on the GOG version of Unreal 2, is to go to

Unreal 2 - The Awakening/singleplayer/system/Default.ini

and change

[D3Ddrv.D3DRenderDevice]
ReduceMouseLag=True

change to

[D3Ddrv.D3DRenderDevice]
ReduceMouseLag=False

It should now work perfectly!!!

Im posting this because EVERYWHERE else says its under Unreal2.ini which DOES NOT EXIST on my installation!!! So hopefully this saves the next guy the same problem! :)

It is exist however have to be created during the first start of the game. Unreal2.ini generally a copy of Default.ini and later you edit that by changing the in-game settings while Default.ini remains intact for the time you want to use the revert back to default option in the settngs. What you're doing is just editing the file before generation which also affects the default settings you're able to revert back. :)