I compiled a new kernel and it boots fine. The problem is the keyboard and mouse don't work. What options need to be set in the .config file for these two to work?

This all depends on the type of keyboard and mouse. But you definitely need:
Device Drivers -> Input Device Support -> Mouse Interface =yes
Device Drivers -> Input Device Support -> Event interface=yes (required for X11 evdev input driver)
Device Drivers -> Input Device Support -> Keyboards (select the appropriate keyboard)
Device Drivers -> Input Device Support -> Mice (select the appropriate mouse)

For PS2 kybd/mouse you also need serio support:
Device Drivers -> Input Device Support -> Hardware IO ports

For USB kybd/mouse you also need HID support:
Device Drivers -> HID Devices -> Generic HID support -> /dev/hidraw ... = yes
Device Drivers -> HID Devices -> USB full HID support = yes
Device Drivers -> HID Devices -> /dev/hidraw raw HID device support=yes
Device Drivers -> HID Devices -> Special HID Drivers (select the appropriate drivers)

For USB kybd/mouse you also need to select the appropriate USB drivers (UHCI, OHCI etc).

These should be statically linked driver, especially the HID drivers.

Hope it helps.