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Make-Believe Goes Cutting Edge

It looks like something George Lucas would dream up if he needed another Star Wars character. The new I-Dog from Hasbro (HAS) has swinging plastic ears and light-emitting diodes on his shiny chrome head. Connect him to your digital music player, and the pint-size pup blasts tunes from a speaker in his back. Then his head will light up and sway along with the sounds. He'll be available in stores this fall for $29.99.

I-Dog is just one example of how the toy industry is combating a troublesome trend. Kids have largely been passing by stalwarts such as Barbie and Mr. Potato Head in favor of flashier higher-tech gadgets -- from video games to MP3 players. Last year, traditional-toy sales in the U.S. fell 3%, to $20.1 billion, according to market researcher NPD Group.

EARLY START. To fight back, toymakers are designing products that either work with or emulate the electronic gizmos that have been stealing their sales. In a toy-aisle version of if-you-can't-beat-'em-join-'em, companies are making karaoke machines shaped like Cinderella's pumpkin coach and handheld gaming devices that teach math and spelling.

"In today's world, a child is on the computer at age 3," says James Silver, publisher of the Toy Book, an industry trade magazine. "The toy business is becoming the family entertainment business." (See accompanying Slide Show, "Toy Stories").

Just take a look at the flurry of new video cameras on the market. MGA Entertainment, manufacturers of Bratz dolls, made its Bratz Digital Video Camera look like a purse. Mattel (MAT) is rolling out its Vidster camera, with a handle on the bottom to make it easier for kids to hold.

NOT GROWN-UP ENOUGH? Industry insiders say the one to watch will be Hasbro's Vcam Now. That's not because its video and music editing features are superior or because it's priced lower (kids' video cameras all cost between $80 and $99). With its sleek orange and stainless steel cover, Vcam Now just looks like a gadget an adult would use.

That's a point Hasbro may have forgotten in creating its Chatnow handheld communication devices. Made for kids 8 and up whose parents aren't ready to allow them to use cell phones, Chatnow ($75 for two) lets kids talk, send text messages, and take photos with its phone-like devices. Their range, however, is limited to 2 miles, something that may also limit its sales.

"Kids don't want a walkie-talkie that looks like a cell phone," shrugs Sean McGowan, a toy-industry analyst at Harris Nesbitt Securities. "They want a cell phone."

iPOD INFLUENCE. Digital music players are also getting a makeover. Disney's (DIS) Mix Sticks ($49) come in funky shades of purple and green, have controls shaped like mouse ears, and are decorated with drawings of such characters as Tinkerbell.

Like Apple Computer (AAPL) with its iPod, Disney is selling Mix Sticks kid-oriented accessories, such as smaller headphones and a pink carrying case that resembles a purse. MGA's Bratz Plugged In Liptunes MP3 player ($79) is shaped like an oversize tube of lipstick.

"Everybody wants an iPod," says Ellie Shapiro, an independent toy inventor and consultant. "There's no question the demand is there." The children's MP3 devices work with Napster and other music services linked with Microsoft (MSFT), but not with Apple's popular iTunes, which support the iPod music players.

ELECTRONIC ARTISTRY. The fast-growing electronic-learning category is connecting with -- of all things -- the boob tube. This year LeapFrog Enterprises (LF), makers of the popular Leap Pad electronic learning systems, is introducing its new L-Max learning system ($99). A handheld device that connects to the TV, it enables parents to watch and interact with their kids as they go through software titles such as Spider-Man: The Case of the Sinister Speller.

Similarly, Vtech has shrunk its popular V.Smile TV-based learning device into a portable version that either connects to the TV or can be taken on the road. V.Smile Pocket costs $89. Separate "smartridges," educational games featuring such characters as Bob the Builder and Elmo, cost $20 each.

Other digital toys connect to the computer. Disney's Dreamsketcher ($59) is a stylus-operated electronic sketch pad that lets you plays games as well as color and store drawings for printing via a PC. It's priced about $20 less than Mattel's two-year-old and similarly configured Color Pixter device, which has sold well.

PIXEL CHICKS CONNECT. Companies are also taking the fantasy worlds that girls used to create with dolls and translating them into new electronic products. Hasbro's DreamLife ($39) is a role-playing game that plugs into the TV and allows girls to earn points by doing things like playing after-school sports, making friends, or getting a job. The imaginary characters can also buy clothes and furnish their rooms.

Mattel is taking the concept to an even smaller scale with Pixel Chix ($29), a plastic playhouse for an imaginary friend whose hologram-like image appears on a small screen. The character eats, sleeps, and cops an attitude if you ignore her. If a child and a real-life pal each have a Pixel Chix, the virtual friends can visit each other. "The electronics help bring the friend to life," says Timothy Kilpin, Mattel's senior vice-president for girls marketing and design.

In some cases, manufacturers are even taking on the computer industry. LeapFrog's Fly is being billed as the world's first "pentop" computer aimed at the tween market, kids 9 to 14 years old.

INTRIGUED PARENTS. Shaped like a pen, the device works as a music player, game device, calculator, and scheduler. Write down "Sept. 25, 3:30 p.m. soccer practice" on a sheet of paper, for example, and on that date the pen's electronic voice will remind you to go. Draw drums or a keyboard, and you can play and record music.

The Fly costs $99, but that doesn't seem to be a deterrent for some parents. "I'd buy one," says Brook Gilchriest, a father of two in Silsbee, Tex. "It sounds cool."

By Christopher Palmeri in Los Angeles

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