Troubleshooting Kindle Touch locking on password prompt

[morbeo]

Hello,

I have purchased Kindle Touch WiFi only a little more than year ago and used it about a few hours every week. Couple of months ago I lent it to a friend and he returned it to me yesterday because of the following issue - it locks when you try to enter pin code. It is configured to prompt for the code when you wake the device. When the login window opens up and when you touch the screen to enter digits the cursor from the input field disappears and the device is unresponsive. Rebooting gets you to the same login which locks you again.

Using Kubrick I entered the diagnostic mode and the touch screen is working there. I ran several of the tests, flashed the drive and rebooted. Locked again on touch. With Kubrick I reset the device to factory default. Now it prompts to choose a language when I start it and I can select one of the options, but now I cannot select the OK button. When you choose a language it opens a window with OK and Cancel buttons and it doesn't matter which one I select, it always highlights the Cancel. This leads me to believe something may be wrong with the touchscreen, like it's offput or something like that.

The question is where do I go from here?