Step 5Gratuitous Layout Video and Picture
Other "micro-controller" implementations under consideration for the layout:
IR or CdS sensors at end of tracks to prevent running off the ends (check out www.instructables.com/id/A-very-simple-proximity-detector/).
Use sensors for auto-reversing for unattended layout operation (probably just back-and-forth on center spur).
Micro-controlled throwout operation using servos or this ingenious analog device. Use sensors to prevent throwout operation while train on top of it (causes derailment).
Lady Ada's wave shield to provide audio feedback on events like "off the track" or "on the switch". Unfortunately, you can't stack the wave and motor shields (no enough pins available to run both simultaneously). I may just wire up a single motor controller and use the wave shield.
Let me know what else you think it could benefit from.
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You can also use reed switches for train differentiation. Imagine two locos, one with two magnets spaced 1" apart and the other with the magnets 2" apart. With 3 reed switches spaced 1" and 1" you can detect if switches 1 and 2 are closed at the same time or if switches 1 and 3 are closed at the same time. Simply ground one end of switch 1 and connect the other end to both switches 2 and 3. The outputs of switches 2 and 3 will tell you which train is present.
My idea is for an automatic 'hump' shunting yard. The wagons would have a bar code stuck to the underside and a bar code reader in the hump would read the barcode and switch the points to the appropriate track. I don't yet know how to do this, but I'm sure that it could be done with an Arduino!