Just the simple interfacing of camera with the micro controller sounds a lot of fun, then how about real time object tracking? This device has an amazing 27 fps speed and can track multiple objects which are defined by colors. The image sensor is OV6620 CMOS, and the brain is the ATmega8, trough the serial interface the user can download snapshots, configure the device or just view the tracked objects.
This project is an ideal start-up for those involved in robotics, by upgrading the basic IR based obstacle detection your robots gain a lot more freedom and intelligence. Beside the amazing speed of execution the hardware is quite simple, my first thought was that the firmware is written in assembler I was surprised to see that the entire project is written in C. The PC program is in java and made available by the author, great way to get started with image processing methods and algorithms.
If you want to embed this project into your application the best way is to build it as is, and use a second controller for the other functions, since the tight synchronization needed between the atmega8 and the image sensor any other functionality would greatly reduce the image processing speed.