By most accounts, this story is a hoax – see this
5/17/2005 snopes.com article.
It’s a compelling myth, however, because its clearly technically possible. Keyghost is a real and legitimate company, from whom anyone can buy a simple, under $100 device that can be installed in under a minute by anybody on a desktop machine, and in not much more time by anyone capable of cracking the case on a laptop. Unless you’ve disassembled and thoroughly traced your keyboard cable to the motherboard (and checked your motherboard for any modifications), you can’t be 100% sure that someone, government or other, has installed such a gadget on your hardware! Worse, if you assume a motherboard or chipset manufacturer is in on such a conspiracy, a keystroke logger could be installed in a way undetectable anyway short of pulverizing your hardware and scanning is under a atomic force microscope or something similar.
Software keystroke loggers are likely a greater threat for most of us. I actually wrote and installed one on a machine of mine some years ago, though it was easily detected by scan tools like MSWindows scf.exe.
Just more evidence, IMO, that the fight to preserve privacy is futile, and that the people and their governments all need to understand and embrace
openness, ASAP!