I recently traveled this row before, when my 12th level fighter got a +2 Dancing Scimitar (a +6 weapon!!!) and I came to the realization that it was useless compared to my +1 Flaming Burst Scimitar (+3 weapon). After a lot of reasearch and questioning (here and elsewhere), here is what the Dancing Property actually does (from the wielder's point of view):
As a Standard Action a character can activate a Dancing weapon.
When activated, a Dancing Weapon attacks on its own. It attacks with the BAB bonus of the person who activated it (including multiple attacks if the wielder has them i.e BAB +6/+1), plus the enhancement bonus of the weapon itself. The damge dealt by the weapon is equal to the base damage of the weapon plus its enhancment bonus. The character is not actually attacking with the weapon for feats that effect attack rolls.
For example, my 12th level fighter with 20 Str, Weapon Focus, Greater Focus, Specialization, & Improved Critical Scimtar, and Power Attack would be like this. While attacking with a +2 Dancing Scimitar: +21/+15/+11; 1d6+9; 15-20/x2. While Dancing: +14/+9/+4; 1d6; 18-20/x2. If I take a 5 point penalty for Power Attack, the Dancing weapon does not recieve this penalty nor does it recieve the bonus to damage.
On the surface, this seems like a bad deal. I did the math, and I did more average damage just Full Attacking every round instead of wasting a standard action to activate a Dancing weapon for a measly increase in damage for a few rounds then wasting more actions to put away a weapon & grab it 4 rds later. However, that's not the power of Dancing.
While Dancing, it attacks every round (including multiple times if you have a BAB over +6) even if you take OTHER actions. Thus, in the above example, I can take a Move Action or Full Round Action & my Dancing Scimitar while still get 3 Attacks at +14/+9/+4. Dancing is a way to combine multiple attacks with Standard, Move & Full Round Actions, a VERY, VERY hard thing to do in 3.0 & 3.5.
However, there is still some things I'm not sure about. Such as whether a Bless, Prayer, of Bard's Inspire Ability affects a Dancing Item (as its not really attacking, just a magic effect that uses an attack roll).
Hope this helps,