self-plug:
http://sr3d.github.com/GithubFinder/?user_id=github&repo...and click on README.md and you can diff to see how the README.md file changed overtime.
A nice Readme is a good way to help people engage in the project as well. A project with nice README and screenshots will get the attention of users better since it's a good and direct way to explain why this project matters, and why people should use and contribute to the project. Good readme should also include enough details to help a new user get started, e.g. how to compile, how to install, and how to start integrating.
Also, I watched a Google video of Brian Fitzpatrick and Ben Collins, who developed Subversion, on how to defend open source projects from "poisonous". Their number one rule is "When you launch a project, carefully define your mission - and post that mission to a conspicuous web page." (http://www.theregister.co.uk/2008/05/30/google_open_source_t...) A readme can serve as a mission statement to define a clear path of the project.
If a project is like a book, the Readme file would be the cover with all the raves and hooks to get people to pick up the book. But as they say, "don't judge a book by its cover", "don't judge a project by its Readme file" either. But good readme will definitely help.