Did some more trial and error on this with the morning coffee. And discovered after plugging into another computer and seeing none of the problems noted above, I went back to the old mac and sure enough USB Overdrive got me again. This time on the Any Keyboard, Any Application setting. All I had to do was disable the Any keyboard, Any Application and that resolved the weirdness completely.
FYI if your using USB Overdrive and a Model 1 with firmware newer than 1.22 you will want this unchecked like so.
