I had a box with this (almost) exact problem(but on openSUSE 10.3) - there was a KVM switch involved, and an older keyboard. Could be a BIOS problem, flaky hardware, who knows.
Anyway, the workaround was after booting, enter Ctl+ALT+F4 to get a login prompt. Then (without using the prompt) enter Ctl+ALT+F7 to get back to the graphical login, and from then until the next boot it worked.
I have noticed that this problem only happens when the arrow of the mouse is on the virtual keyboard.
If I place the arrow out of the virtual keyboard, the dots stop. It is as if the virtual keys were being pressed.