We've played around with one a bit at the office, and I'm sure I would have been crazy about it if I were younger.
It uses an image sensor, and reads little dots on specially printed paper, that allow it to determine its location, and uses this to location information to follow pen strokes and convert them to text and symbols.
You can draw keyboards and drum sets and tap them to make music; you can draw calculators and use them to calculate (the pen speaks the numbers back at you); and it comes with pre-made games and puzzles, such as an interactive map on which it asks you to locate as many states as you can in 60 seconds.
It's quite amazing what a full computer experience it is able to generate using just pen input and spoken output.
The only real drawback is that you can't disable ink drawing without putting in a ball-point pen without ink, which means you dirty up the game pads it comes with, for no reason, except to make you buy new ones. You can retract the pen, but this disables the FLY pen, because it uses the pen tip as a tap (~mouse click).
It's actually amazing what $130 can get you, at least if you don't get caught up buying additional games for it.
The FLY is based on
Anoto's technology, licensed by
Leapfrog.