Having a real "client" in mind when designing your project seems to have worked well.  Your puppets became much simpler between your initial proposal and your final presentation, which is good considering that you want to design something that can be mass produced and that is fairly robust.  Your use cases seem well thought out, although they may need to be simplified a little further -- it will be a challenge to find the right interface that spans individual and group use of the puppets, but you definitely seem to be on the right path! It is worth doing a simple WOZ study to see how different mappings do or do not make sense to participants.