Reporting back as promised. Well, my nephew looked in the gift bag and saw only the top of the bears head. He screamed NOOOOO and ran off to hide behind the couch.
When we finally got him back in the room to finish opening his presents, he opened a card that had money in it and said "that's better".
We tried to open the box just to see if he would like it better when we put the batteries in but he wanted no part of it. Good thing I put the receipt in the bag. My sister is returning it tomorrow.
I will forever be known as the Aunt who terrified her 3 y/o nephew.