Thank you for reply.
The story here goes a bot longer but I tried to save you the details. So here are some more details.
the problem started to occur in mid December when the USB mouse stopped working. I tried to reinstall drivers
but it didn't help. After many experiments we narrowed it down to a particular Windows update which failed. We rolled it back and the mouse started to work again.
I was happy we found a reason. So I disabled automatic updates and gave this laptop to my daughter to play with while I was helping her (she is 5 y.o. and the only game she had a chance to play with was Shidonni - Safe virtual world for kids redirect
which requires Silverlight 3.0).
Note, the computer was a completely clean Vista x64 reinstall, working perfectly with the USB mouse. After working on this website (which required Silverlight 3.0) for about 30 min, the problem came back and the mouse stopped working.
This drove me nuts. After a month of struggling, paying money to sysadmins and spending a lot of time looking for a fix, I am still left with two laptops having identical problems and making the system unusable.
I looked all over the web but I couldn't find anyone else with exactly the same problem. People complain on other USB peripherals stopped working and I wasn't sure it applied to my situation.