Mouse & Keyboard functions failing to register sometimes

I restored this Compaq Presario 2100 Laptop (1800+ AMD XP processor with 512 RAM and Windows XP) to factory state using the system recovery disks. Restore went well except there is a persistent problem of the keyboard and mouse failing to register commands in that mouse and keyboard presses sometimes don't register and have to be repeated. Also, mouse movements persistently hesitate in the middle of a move.

I have to repeat about one in five key presses as well as about one in five mouse clicks.

This problem started immediately after system recovery, before doing any updates or connecting to any network or internet and does not happen in DOS mode. The problem continues after repeating the system recovery and doing all available Windows updates, except IE7.

Any clues on how to troubleshoot this would be appreciated.