Second Life only uses the first joystick-type device it finds. It finds the 3DxWare emulation joystick before it finds the native SpaceNavigator, so it tries to use that, which doesn't work well.
To work with Second Life, you have to Disable the 3Dconnexion emulation Joystick. After this, SL will use the native 3D mouse.
You also have to define a special profile for Second Life.
The steps are:
1) Start the Device Manager and find the "HID-compliant game controller" that has an ID Value of HID/3DXKMJ_HIDMINI&Col03 (Properties->Details->Hardware Ids).
2) Disable that device (Properties->Driver->Disable).
3) Create a profile for Second Life using the 3DMouse template.
4) Edit that new profile with notepad. Change
<Transport>S80</Transport>
to
<Transport>DirectInput</Transport>
5) Restart Second Life.
6) Make sure you Enable your 3D mouse at the top of in Second Life->Me->Preferences->Move & View->Other Devices.
You have to reenable your emulation joystick in the Device Manager to play other games that use the joystick interface.

