Since it is only the Upgrade Edition you will have to install Windows 98 First.
There is a way to use a upgrade disc for a full install...
XP Clean Install
Read thru that it should help you out. You will format the drive before you install. As you have to have at least 1 partition created and formatted in order to install Windows XP.
A PS/2 Keyboard is not necessary. I have a USB Keyboard that works just fine to isntall XP, Vista, Linux and OS X. AUSB Keyboard is jsut fine. Espically if you can get into your BIOS and mess with that with the USB Keyboard.