I've got a Z170 OC Formula that I just setup last week. I'm seeing the exact kind of problems you mentioned. Windows 7 DVD boots up but on the first screen the USB mouse & keyboard are dead. They work fine in the BIOS. I tried every USB port on the board (9 external & 1 internal) with no luck. There are some BIOS settings for legacy PS/2 support. If I muck with them, the keyboard & mouse work, and I can get past the first screen, but the second or third screen throws an error saying it can't find the installation files which are on the DVD. Here's the thing, it's a USB DVD drive, so I think the BIOS changes that let the keyboard work also screw up the Windows install from seeing the files. I've been told it has something to do with the newer USB drivers not being on the Windows 7 install DVD. Installing Ubuntu works fine and I just installed Windows 8 with no issues. So it appears to be limited to Windows 7 DVDs. It's very likely that with a SATA DVD drive, you'd probably be alright.
This board also has a PS/2 port for a PS/2 keyboard/mouse splitter. I happened to have one of those & tried it out too, but didn't have any luck. Honestly I didn't screw with it too long though.