ok, so I finally solved my own problem. took a while. tried a couple more things in the process.
Tried just changing the SAM file (changes the users to original) that did not work.
Found a way to do a manual uninstall of the last few windows updates
(to do this you go to recovery console , change directory to the update you want to uninstall i.e. $ntunsinstallkb######$/spuninst/ and run the command: batch spunist.txt - note it doesnt work all that good sometimes)
tried that it did not work
Eventually after searching on microsofts website about drivers I found out I have been replacing the wrong file. I needed to replace the i8042prt.sys file - thats the one that runs the ps2 ports - why usb didnt work dont know. - I may have screwed it up since it doesnt work now when I swapped a bunch of files. ill go back and fix it.
anyway, I took the i8042prt.sys file from my c:/i386/system32 directory (i think it was that one, maybe a subdirectory or just 1386) and deleted the one in c:\windows\system32\drivers\ (which happened to be dated the problem date appeard) and put the one from i386 in there (btw, I needed to use a linux boot cd since recovery console would not let me into the i386 directory)
the file I replaced it with was from 2002.
once I rebooted, the mouse and keys worked!! yeah!!
hope this helps somoene else, and they dont have to pay dell $130 bucks for nothin (i didnt either, called and hung up, they were going to make me do a system restore, which wouldnt have worked since my computer is from 2003 and does not have a ghost drive.)