Some ideas that come to mind:
sample based instrument- store samples on the Arduino or on an SD card and trigger playback with buttons or other types of controls. Check out my Arduino drum sampler for an idea of how to get started.
digital synthesizer- make saw, sine, triangle, pulse, or arbitrary waveshapes- check out my waveform generator to get started
MIDI to control voltage module/ MIDI synthesizer- receive MIDI messages and translate them into a voltage so you can control an analog synthesizer with MIDI, or use the MIDI data to output audio of a certain frequency
analog output- you may find yourself needing to generate analog voltages from your Arduino at some point, maybe to communicate with an analog device
effects box/digital signal processing- in combination with a microphone/audio input you can perform all kinds of digital signal manipulations and send the processed audio out to speakers. Check out my vocal effects box for an example.
audio playback device- make your own ipod. With the addition of an SD shield you could create your own Arduino mp3 player (check out the wave shield documentation for an idea of how to get started with the code). The circuits and code provided here are compatible with SD shields that communicate via SPI.
Feel free to use any of the info here to put together an amazing project for the DIY Audio Contest! We're giving away an HDTV, some DSLR cameras, and tons of other great stuff! The contest closes Nov 26.
(x9) 1/4 Watt 20kOhm Resistors Digikey 0KQBK-ND
(x7) 1/4 Watt 10kOhm Resistors Digiikey CF14JT10K0CT-ND
(x2) TS922IN Digikey 497-3049-5-ND I like these because they can be powered off the Arduino's 5V supply (one 924 works too, but they don't seem to be available on digikey at the moment)
(x1) 10kOhm potentiometer linear Digikey 987-1308-ND
(x1) 0.01uF capacitor Digikey 445-5252-ND
(x1) 220uF capacitor Digikey P5183-ND
(x1) 0.1uF capacitor Digikey 445-5303-ND
(x1) 1/4 Watt 3kOhm Resistor Digikey CF14JT3K00CT-ND
(x1) 1/4 Watt 10Ohm Resistor Digikey CF14JT10R0CT-ND
(x1) Arduino Uno Sparkfun DEV-09950
22 Gauge Wire