。
She's playing with dolls.
Literal
She [topic-は] dolls [with-で] is-playing.
The particle で here marks the instrument or means of play — she's playing by means of dolls. This instrumental use of で is distinct from the locative 'at/in' sense seen in phrases like 図書館で ('at the library'). English uses 'with' for both instruments and companions, but Japanese distinguishes them: で for instruments, と for companions.