It's going to be a totally custom job. I'm not trying to be a **** head or make a smart *** comments but if you have to ask its above your skill set. If you just want a cheap kids toy I think you an shove a 50¢ 5mm colored LED down the incan socket but...
As you found there's no good quality drop ins (maybe none at all for the 2xAAA version, there are a few cheap ones for the 2xAA) and like lynx said you can buy a led minimag for under $20, it will cost that much for a drop in and the real led mag is better than the drop in in terms of light output, beam pattern, run time, every way.
If you really want to upgrade it (to do it right) you will need to decide what emitter want to use, machine a aluminum heatsink/emitter mount to fit the head, decide if you want to make that work with the stock reflector (otherwise you'll need to machine a reflector too) then find a driver that will fit the left over space and run off of 2xAAA's and solder all that together. Don't forget a glass lens and the thermal epoxy/compound you'll use. Be ready to spend $50+ on materials alone to do it this way and if you can't machine the aluminum yourself I'd triple that figure. Oh yea since its a twist loose to turn on light you'll have to figure out how to switch it on and off too.
Please don't be offended, when I first started modding lights I wanted to shove an LED in every old light I owned too, then I sat back, thought about what it would really take, realize for that I could buy a MUCH MUCH better light and left the minimag in the random crap drawer untouched. It still gives off usable light, let it do that and get yourself something 100 times brighter, with a better UI, in a nicer more durable package, with everything else you might want.
