Finally I discovered that the issue is due to the X driver
1. Xgl was taking 50% of CPU usage..was using intel driver
2. Switched to vesa driver. and everything is smooth including keyboard!!! 

Hope this helps for ppl using onboard Intel Graphics GMA 3100 ..
:)

** Summary changed:

- Logitech Internet 350 USB keyboard keys no longer function properly after 
upgrading to intrepid beta
+ Logitech Internet 350 USB keyboard keys no longer function properly after 
upgrading to intrepid beta due to Intel/Xgl driver

** Tags added: intel xgl

-- 
Logitech Internet 350 USB keyboard keys no longer function properly after 
upgrading to intrepid beta due to Intel/Xgl driver 
https://bugs.launchpad.net/bugs/277718
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