I frequently use ninite.com which is similar. It's certainly a good idea. I think "not using any database" is nonsense. Almost every piece of software in existence has to work with some form of data.
I think it's a great requirement. So many of the projects would turn into CRUD apps. It's Computer Science and there are a lot of other interesting things to do which students will never consider without making them stretch a bit. I think too many programmers are devoting their efforts to geo/social/commerce/blog apps and are losing sight of all other problems. My senior project was on audio synthesis, granular synth…
I think it's great that it makes sense to veto generic 'web applications' or even 'business applications' in general, but I can't see why they need to impose such a broad restriction in order to make it happen. Why isn't it sufficient just to tell everyone "no basic applications - we're doing science, not software engineering methodology" and leave it at that?