Alternately, rather than projecting onto physical surfaces, it could project holographic images several inches above itself. Living Friendship Bracelets Bracelets that glow and swirl with color when worn. The idea is to be able to have album with movie clips in the same way you have pictures. I imagine them in a format similar to a Polaroid picture. A lightbright toy that enables you to wire logic in addition to creating static patterns.
Kids draw on paper on top of a digitizing tablet.
The image can then be animated by a computer and kids can add a story to go with it. This is inspired by a toy my kids really enjoyed. You can control their brightness and color and animated the image you produce.