Note: There are a number of projects that are quite nice but not photogenic (for example, playing music on a speaker, Morse code generator, Multi-precision match calculation engine). The below are representative of the more hardware-oriented projects. Pure software projects or projects that just use the provided I/O are also fine for full course credit and "cool project" bragging rights.
Vector Image Display via Laser Projector / Shane Smith & Elon Bauer
Pong / Dale Best & Connor Walsh
LED Etch-A-Sketch / David Campbell & Jonathan Leung
Use two potentiometers to draw designs on an LED grid (push button to leave blank segments)
Thermostatic Fan Control / Braden Kell & Robert von Stange
Snake Game / Naman Seth & Ji Hye Lee
RTOS with Mutex / Terence An & Tom Chittenden
Music Player / Edward Nolan & Akash Sethi
Color-Based Whack-A-Mole / Symone Lessington & Jacob Nelson
IR-Triggered Counter / James Sakai & Peter McHale
Morse Code to ASCII Interpeter / Jianxin Yu & Joanne Tse
Ipod Remote Serial Control