Well, it at least seems to confirm something spooky is going on with USB and the HID stuff.
But why it is doing it, I can't tell.
If you have more space available on the drive, maybe you should make another partition and try installing all the way - FE from CD, then update1 (manually, not via AmiUpdate!), then update2 and whatever else AmiUpdate offers at that point, bit by bit. Hopefully you'll be able to get through it that way - it has worked for many others, myself included.
You don't happen to have a very special keyboard or mouse, do you? If so, try replacing them (at least temporarily) with more simple standard ones.
Best regards,
Niels