The story of NASA spending millions of dollars to create a pen that worked in space for their astronauts, while the Russians just opted to use pencils, is often cited as a KISS example. However, it turns out that it’s just that – a story, and not the reality.
I first came across the actual story behind the space pen in the Geek Trivia article of TechRepublic. Apparently, both the Americans and Russians opted to use pencils initially, but turned out to have several problems due to the tips breaking off, and their flammable nature (in the high oxygen environment). NASA did opt to use mechanical pencils initially, but they were pretty expensive (almost $130).
In the end both parties started using the space pen developed by the Fisher Pen company which was a lot cheaper ($2.39 after a bulk discount). The research behind development of the pen did require around a million dollars, and patented in 1965. But, this was done by the pen company and not NASA. Also, if you are interested in buying one, it costs around $50.
There is also a detailed Scientific American article on the space pen which appeared last December.