|Do you have a PS/2 mouse/keyboard you might be able to use for now? The USB controllers on your system may be going bad, although that's a wild shot in the dark. I had Windows Setup do strange things with a motherboard that had a faulty USB controller.|
Can you boot to Safe Mode and login as Administrator?
Is the Windows Setup CD scratched by any chance?
If possible, go into the BIOS and disable your USB Controllers. Now try Windows Setup again. Does it successfully load this time? Unless you have a PS/2 mouse/keyboard, you won't be able to continue with setup, but this may indicate what the problem might be.
Do you, by any chance, know what model motherboard you have in this system?
By the way, when did this start happening?