http://space.about.com/od/spaceexplorationhistory/a/spacepen.htm
The Fisher Space Pen
The Truth About the NASA Urban Legend of The Fisher Space Pen
by Nick Greene
for About.com
During the space race in the 1960's, NASA was faced with the huge problem of how to write in the vacuum and weightlessness of space. There is an email that makes the rounds stating that NASA spent $1.5 millin dollars developing a "space pen," and that the Russians facing the same problem simply used a pencil.
Well, although the US government has been known to be quite wasteful at times, the truth is that early NASA astronauts also used pencils. For Project Gemini, for example, NASA ordered mechanical pencils in 1965 from Tycam Engineering Manufacturing, Inc., in Houston. The fixed price contract purchased 34 units at a total cost of $4,382.50, or $128.89 per unit. That created something of a controversy at the time, as many people believed it was a frivolous expense. NASA backtracked immediately and equipped the astronauts with less costly items.