(FORTUNE Small Business) – Most people who own model trains take them out for a few weeks this time of year and pack them away for the other 11 months. Not Ron Varnell. The owner of South Bay Casino Rentals in Torrance, Calif., Varnell, 59, is a serious train collector and has been for 35 years. Lining the walls of his office, as well as his secretary's, are dozens of Plexiglas cases filled with model trains—400 of them.

"People often ask, 'What is it you do here?' " he says. For the record, his company rents out blackjack tables and other gaming equipment, along with dealers, for charity events and conferences. He started with a $50 investment in a single poker table 13 years ago and now brings in $1.2 million a year in sales.

That's his business, but Varnell's passion is trains. He once hired a Canadian company that specializes in collectibles to track down a limited-edition model from the 1996 Winter Olympics. After eight months the firm finally found it in a toy store in Japan. He is one of 25 collectors in the world to own a rare M10000 Union Pacific engine, worth nearly $4,000. To snag it off eBay, Varnell had friends babysit the bidding on his computer while he went to work. Over the years he has attended more than 50 model-train shows and invested $170,000 in his collection, spending as much as $5,400 for a single train.

Lately technology has transformed the hobby, giving Varnell a new reason to be enthralled. He is retrofitting his favorite engines with tiny digital decoders so they can respond to commands from a handheld controller. Instead of watching his miniatures circle silently at the same monotonous speed, Varnell can now remotely direct his trains to slow down on hills, replicating the movements of real locomotives. He can turn lights on and off inside cars, and digital speakers allow him to program sounds ranging from a diesel engine's thrum to squealing brakes. For model railroaders, it's heady stuff.

Since its popularity peaked in the 1950s, model railroading has chugged slowly downhill as kids became more interested in videogames. But now the same microelectronics that fostered the hobby's decline are inspiring new enthusiasm among its fans. At weekly meetings of the Los Angeles Model Railroading Society (Varnell is president), members stay up until 1 a.m. to convert the railroad's power system so that digital trains can run on the tracks.

"Before the new technology there was nothing really making the hobby worthwhile," says Bob Santelli, digital train technician at Allied Model Trains in Culver City, Calif. Santelli spends his days retrofitting brass trains from collectors as far away as New Zealand, who are willing to spend as much as $30,000.

That kind of money is encouraging model-train companies to splurge on development. Mike Wolf, owner of MTH Electric Trains in Columbia, Md., spent $4 million to create sound processors that allow model trains to play everything from Bing Crosby Christmas songs to conductor banter. To get phrases such as "Next stop, Memphis!" with an authentic drawl, MTH employees traveled to train yards and recorded dispatchers' conversations.

The new technology may not rival that of the Xbox or iPod, but for die-hard collectors such as Varnell, it has given new life to an old passion.