|Edits, notes, and additional info:|
1) It should be noted that when this problem is encountered, switching USB ports doesn't work and trying it in Safe Mode makes no difference. All USB input is disabled, but only in Windows. Keyboard and mouse input still works in the BIOS and it works if you boot to a CD/DVD that has a GUI. The only hardware workaround i can think of to avoid formatting and re-installing would be to pop in a low-profile PCI or PCI-E USB card or a low-profile PCI PS2 card (and who has one of those just lying around?).
2) I also should have mentioned that before i attempted to re-install the drivers manually, i didn't format and re-install XP. I booted to a Winternals ERD Commander CD and performed a system restore from there. Windows XP creates a restore point at the first successful boot, and that's the one i used. Since there wasn't much to roll back it only took a few seconds. When i rebooted i had full keyboard and mouse control again.
3) The NIC driver installer doesn't allow you the option of extracting instead of installing. So, when i went through my re-attempt, i simply installed it. Consequently, it was the first device installed and there were no adverse effects.
4) The path to create a restore point in XP that i mention in the last paragraph of my post is: Start -> All Programs -> Accessories -> System Tools -> System Restore
5) In Dell's forums (where this issue is STILL unresolved) a user states that the proper order for installing system drivers starts with the chipset, and this is true 99% of the time. However, in this case it's probably the wrong move unless you manually install the driver as i suggest.
Another user states that XP and 7 use the same chipset driver. This is not exactly true. The actual driver files themselves are different for XP than 7, BUT the executable package that delivers all of the drivers available from Dell is the same for XP, Vista, 7(32b), & 7(64b).
DRVR_WIN_R257446.EXE, Version 188.8.131.525,A02
6) So, if going through the normally prompted installation procedure kills the USB but manually installing the driver works, it means that something is very wrong with the installer software here. Dell used to create all of their driver packages in-house. I don't know if that's still true, and i don't know if Dell or Intel created this installer. If Dell did then it might get fixed if you bug them to death (since similar USB issues have been reported in other Optiplex models), but if Intel did you can forget it.
My hypothesis is that one of the following things is happening when you run the installer: Either a registry key is getting changed or installed that causes the USB to shut down due to a communication error in a controller (Processor to I/O Controller or Programmable interrupt controller maybe?) or perhaps it's an error in the device enumeration (again, probably in the registry).
Experienced techs know that when you install Intel devices, their software drops stuff into your startup configuration. These items are usually unnecessary and i always disable them. So, it could be that the .exe that performs power monitoring functions that runs every time you boot your PC is causing some miscommunication with the ACPI functionality in Windows or even the BIOS. Testing this part would require the hardware workaround i mentioned above, running msconfig, and disabling all of the items Intel-related in the Startup tab and Services tab. Since i don't have the hardware workaround handy, i'll have to leave that to someone else.
7) The other mystery related to this for Win7 users is why this happens after everything had been working fine for a lengthy period of time. Since this PC shipped with Win7 installed, my guess is that it's a Windows update that triggers it, or they have some 3rd party executable running in the background that doesn't get along with the Intel stuff that's already running. Since they've been working from a factory image installation where driver installers are not used, they've never seen the problem before. Then, when they're forced to re-install the OS and the drivers, they run into the same thing right away because of the bad installer. I wonder how many people have trashed their Optiplex computers because they think the motherboard is bad...
Man. That was a long follow-up. Cheers, and good luck.
As requested, here is the original thread: