Proof of concept
Not much more you can add really, Brad hits the nail on the head really.
You can see number 2 and beyond expanding on this big time as well as a wii version (wii plus, write in the air to write text on screen)
From this you can see a lot of the limitations can be solved. Extend the wordbase of course but for each object create multiple states of use and then intelligently know what the situation is to use the correct state. So when you want to put out a fire the objects that could know you want to put out a fire. Further to that - Failure as well. Throw a blanket on the fire in theory could put it out but if the fire is to big it will just burn the blanket and get bigger and then have your Naut act accordinly.
I do not think they would nail this first time, they haven't but you only need to go add this extra level of functionality and you create something that will be insane. Multiplayer would then work as a result too.