I agree with much of David Merrill's commentary on Just Grandma and Me--in fact, we here at ECU, have completed two research projects into the effectiveness of the Discis Books, as intervention strategies in teaching eight year old children to read. We had to discard the Living Books series as a serious option in our research, since they did not support what are recognized to be (in the literature) fundamental processes in learning to read; whereas, the Discis Books did directly support many of these processes. But then again, I'm not sure whether the Living Books series were ever marketed as reading instruction.
The Living Books series, then, are probably examples of inadequate instructional design (specifically for reading), but when considering motivation, on-task behaviors, experiential learning, and non-cognitive learning (e.g., fine motor skills), as well as pure fun, then we probably have to look again at the Living Books.