Ok, guys... After a long time and a few advances, I give up. I've managed to wipe clean her HDD using DBAN CD in automated mode, cleaning the MBR sector which was severely corrupted (MBR virus). After that and about 7 wasted cds, I was finally able to reinstall Windows XP Media Center via a slipstreamed CD that I built with nLite to run fully automated too - remember KB or mouse wouldn't work. Even though I went this far and now the machine boots the OS, still I couldn't make the KB or touchpad work, not even USB connected ones. I presume this is either a KB/touchpad hardware issue, or more seriously, a motherboard failure. I'll tell my friend that it's maybe time to buy a new laptop, cause I know that a new motherboard will cost pratically the same as a new machine - and it's not worth the trouble!
Thanks to all!