Various rumors have this project green-lighted, with a projection of happening sometime in 2004. There has been nothing official from Disney on this one.
I would imagine they would tone down the scare factor when/if they do this Stitch overlay. The pre-show could easily be turned into a fun Stitch storyline. As for the main attraction, with a bit more light, less ominous noise, and a few adjustments to the effects, I'm sure this ride could be made to be not so scary. I can't see them not toning it down a bit, as a Stitch storyline would be aimed at kids. While I'm sure that would be bad news for the thrill fans, I think it would be great. I find the attraction, as is, to be a disappointment. The first time you see it there is the factor of the unknown, but after that there is little repeat ride value. Disney built this attraction up so much prior to opening, and when it finally opened I was like "is that it?". I'm sure many feel that way, otherwise it wouldn't be up for an overhaul.