Shown off at the 2009 TED conference (aka Mosquito Madness), these Siftables blocks are location aware, motion sensitive, touch interactive and work with other blocks to take on a variety of functions.
Monstermunch posted on the Siftables, which have a 3-axis accelometor that allows for gesture-based controls, and an OLED touchscreen that allows direct user input. Developed in MIT's Media Lab, the blocks communicate with one another while within proximity, meaning they can peform unique functions next to specific blocks. The creator, David Merrill, says this type of physical UI is better suited to the way the brain works, which makes it more intuitive.
In the demo, these blocks, roughly 1.5"x1.5", can be programmed to do anything. They can as a calculator that spit out answers when you put numbers and operation signs in any order and a color blender where you "pour" color blocks into a mixing block. There's even a musical sequencer, where you can rearrange blocks to change patterns, or tap instrument and effects blocks to the sequence to add new sounds on top.
One of the cooler ones was an interactive storybook in which a kid places character and object blocks next to each other, and an improvised, interactive story is projected up on a TV screen.
The thing I like most is that it manages to be forward thinking, while mostly using tech that is currently available for mass production. And they're currently working to patent and commericalize the tech. You can check out more at the Siftables homepage. [Siftables via Monstermunch via BBG]