Holding an API contest is a great way to spur innovation around your API and its community.
bit.ly is a popular URL shortening service that offers an API as part of its core software-as-a-service.
In January 2009 it held a successful API contest and is looking to do it again with a new bit.ly API contest.
The prizes offered::
1st prize - Makerbot Thing-O-Matic 3D Printer
2nd prize - 1TB USB hard drive enclosed in a vintage nintendo game (Zelda, Metroid, etc)
3rd prize - Set of BuckyBalls magnetic building spheres
bit.ly encourages developer to be creative and come up with unexpected uses, but it also plants a few ideas that the company woul'd like to see developers work on.
There are a lot of developers that may know about your API, but not actively involved. Your developers may need a little bit of motivation to get them working.
An API contest is a great way to light the fire under your development community, stimulate innovative uses of your API, and generate some buzz around your API community.