"Sounds like a fun project" was my first reaction when I read some time back the first paper on Steve's work on augmented toys and augmented games. Reading through his thesis and seeing more of his papers it seems there was a lot of hard work, too.
Thinking more about it I was wondering how toys are really going to change in the future and to what extent this is going to happen. Technically a lot is feasible as it is well demonstrated by Steve in his thesis (photo from www.vs.inf.ethz.ch); if you do not have time to read the thesis I recommend to look at two of his papers:  and . They give a good overview of the systems he created. In the discussion we could see that there can be very interesting business model involving third party developers for such toys.
… but nevertheless the playing experience is something very special and I would bet the augmented toys will come but the ordinary non-augmented dolls will stay.
PS: The cafeteria at ETH provided another example of my collection "if you need a sign/label - you have got the UI design wrong" - great example how gestalt law would have been so easy and arrows look so bad ;-)
 Hinske, S. and Langheinrich, M. 2009. W41K: digitally augmenting traditional game environments. In Proceedings of the 3rd international Conference on Tangible and Embedded interaction (Cambridge, United Kingdom, February 16 - 18, 2009). TEI '09. ACM, New York, NY, 99-106. DOI= http://doi.acm.org/10.1145/1517664.1517691
 Hinske, S., Langheinrich, M., and Lampe, M. 2008. Towards guidelines for designing augmented toy environments. InProceedings of the 7th ACM Conference on Designing interactive Systems (Cape Town, South Africa, February 25 - 27, 2008). DIS '08. ACM, New York, NY, 78-87. DOI= http://doi.acm.org/10.1145/1394445.1394454