Hey Alison and Ben,
Biiiiiiiiiig fan. Seriously you guys are a continual source of inspiration and i absolutely LOVE watching the show. Hope one day to venture out to the shop to see first hand what its like to see you guys in action.
My idea for the LED guitar is to use those cheep RGB LED strips to visually echo what is being played on the guitar. That is install the strip in and electric guitar, maybe going up the neck and around the body i dont know it depends on the model, and have the feed amplify (if needed) to make the lights part of what you play. Kinda like what Blum did on his holiday special on the arduino series but maybe not using the SPI to control the LEDs individually. That would be cool but might add too much to the project. I dont know whatever you guys want to bite off its up too you. With the other non SPI LEDS you can utilize light intensity and the rate at which the colors change to create a cool effect.
Anyway I think this would be a very cool project that would illustrate some cool building techniques and be very entertaining to watch you make,
Hope you agree,
-Holden