I've been going back to a restore point even though nothing (to my knowledge) was changed or installed to fix the problem, but it's rather annoying considering I have to do it every single time I boot up. I'd think after doing a system restore once I'd be good to go, but I have to do this every single time I power on.
This comment kind of peaks my interest. Why would a keyboard work after a restore, but the restore state doesn't survive boots? Maybe it's an errant virus or program disabling the keyboard input? I remember a a couple of AOL specific viruses that were annoying in a similar way, but they haven't surfaced in the wild for years.
Try this. Remove the iPac and just use the keyboard. If it still doesn't work. Do the restore. Immediately after the restore, but before you start clicking around to run programs, bring up Task manager and take a snapshot of all the running programs. Save or print the images as a reference. Then do your routine as if you were booting into your arcade to play games. If you can, bring up the task manager and compare what you see now with what you had before.
Of course, if the keyboard isn't working on the second cycle, then you're boned. Start with an intensive virus scan to exclude that possibility. If the keyboard problem is severe enough, you might need to resort to using something like BartPE