It looks like there are more reports on the DSi and it's camera. There is the potential for AR games here, but the big worry is that the device is too slow. There are some details/rumors on the hardware floating around, but it's not looking as promising as I'd like: doing computer vision for any sort of tracking is expensive, and you still need to actually run the game!
That said, being able to do ANY AR on a commodity device will be awesome, as it will create an outlet for AR and drive people's imagination. And focusing on a kids device is key: iPhone games are great when targeted at the > 20 year old set, but so many interesting AR games and "magic books" and so forth are targeted to much younger kids. The iPhone isn't going to be bouncing around in middle-school backpacks any time soon!