Dye wool yarn with Kool Aid. A fun, fragrant project to do with kids you can trust to stay away from hot solutions and hot yarn. You can use food coloring instead of Kool Aid (but won't get the nice smell), and it also works on silk fabric.
FROM Helen Philipps.blogspot.com: A pincushion made with granny squares. There are no written instructions, but I think it would be fairly easy to figure out how to make it just by looking at the picture.