Schofiel,
I had the same exact problem with my brother's system. I would try to install Windows 2000 or Windows XP and run into the same exact problem of it hanging after it loads the keyboard drivers. The system was working fine before that and Windows 98 installs fine. Even without any service packs or anything, I would run into that problem.

I figured out that somehow the PS/2 ports became corrupted. I purchased a USB Keyboard and Mouse and that fixed my problem.

With the USB Keyboard and mouse, whenever the Operating System or other software tries to update the USB drivers, it kills the keyboard and mouse and requires a reinstall or a rollback to the "Last Known Good Configuration".

The only way that I was able to fix this problem fully was to replace the motherboard, but a workaround was to plugin a USB Keyboard and Mouse.