Had graphics settings at 1920, dropped them to 1280. Went from 10 to 4, no difference. Game will play fine for 5 minutes or so, then the cursor starts lagging as you move it around the screen, to the point where it is unplayable. Had a similar issue in episode 1 but it wasn't that bad, episode 2 is much worse.
Might be a windows 7 thing, it sure isn't the hardware...
Windows 7 x64
Intel I7 920
6 GB RAM
GeForce GTX 275