The driver is probably not OK!.. It's probably infected but updating it or replacing it won't help if you don't remove the infection.... so, what you need to do is scan the system for virus and malware. I had such experience a while back and a virus scan solved it... apparently the keyboard driver is vulnerable to infection and if infected it may stop working. I experienced such a problem once and as soon as the infection was deleted the keyboard regained normal function.
You may have to disable System Restore before scanning because as it looks; your System Restore only works temporarily because the infection may be saving copies of itself in the System Restore folder (C: System Volume Information) and is apparently coming back after a restore. If you don't want to disable System Restore for some reason, at least temporarily configure the SVI folder Security to allow the security programs full access so they don't miss detecting the infection, but if you don't succeed, you may have to repeat the scans with SR disabled.
How to Enable and Disable Windows XP's System Restore feature
http://www.kellys-korner-xp.com/xp_restore.htm
How to configure folder security in windows xp
https://www.google.com/#q=how+to+configure+folder+security+in+windows+xp&spell=1
Malwarebytes Anti-Malware Free
http://www.malwarebytes.org/free/
http://www.malwarebytes.org/products/