Some possible suggestions for topics:

We are going to be doing chapters 1-10 in Cover and Thomas. The other chapters contain a lot of good topics for a term paper (although I expect you to use sources other than Cover and Thomas and cover material that are not in the textbook. In particular, chapter 11, Chapter 14, Chapter 15, and Chapter 16 contain a lot of good topics for term papers.

1. Information theory in practice

How do cell phones work? What are FDMA, CDMA, TDMA, coding?

How does CDMA work?

The theory of multiple-access and broadcast channels, and its relation to cell phones.

How does image compression work?

How does video compression work?

How does the coding in CD's work?

2. Theoretical advances in information theory:

Huffman codes with unequal letter costs: these turn out to be much more complicated than standard Huffman codes. For references, google the phrase above.

The work surveyed in Constrained sequences, crossword puzzles, and Shannon (you'll need more references than this, but you should be able to find quite a few of them).

What are BCH codes, or Reed-Muller codes, or Reed-Solomon codes. Where are they used?

What is space-time coding? How do multiple antennas help information transmission?

What is the theory (and maybe some history) of turbo codes?

Explain convolutional codes and the Viterbi algorithm.

What is Slepian-Wolf coding (sec. 15.4)? You could either do the theory, or concentrate on the question: what are practical codes for this problem?

Present Lovasz's result about the zero-error capacity of the 5-cycle, and maybe survey the current state of results on zero-error capacity.

3. Algorithms in information theory:

The Burrows Wheeler transform, why it's useful for data compression and how to do it and its inverse quickly.

The Berlekamp-Massey algorithm for decoding BCH (and related) codes.

List decoding (for Reed-Solomon codes and others; see Madhu Sudan's papers (his survey paper "List decoding: Algorithms and Applications" and others).