Because computers generally make children passive listeners, new technological devices need to support children's storytelling activities. This article introduces the StoryTech, a smart toy that includes a virtual space comprised of computer-based graphics and characters as well as a real space that involves stuffed animals, background cards and a receiver panel. When children put real objects on the receiver panel, the computer displays related backgrounds and characters. Through this flexible context, children are expected to tell a story about what they see on the screen. The aim of this article is to present the development period of the StoryTech and to provide design principles for smart toy technologies based on the usability study. The article focuses on attributes of new technology and the significance of supporting storytelling activities to find the best combination of and moderation between real and virtual spaces.