Very simply it's a USB video cam and set of 12 simple programs, but what is different is that you are the controller. The PS2 can "see" you or more properly your motion. At first you feel silly waving your body around, but soon you forget as you get into the games.
We don't really care about seeing ourselves on screen, but actually physically controlling the game is a blast.
If they every combine the dance pad of DDR with the motion sensing of the EyeToy, video games will become a fun way to exercise.