It's hard to say when you don't know the baby theme. Good old stand byes. pirate, butterflies. Have you looked at the cupcakes on here and check out Mandy Donaldson's page she had some cute ones, moon & stars & bear + more.
Here are some I think are adorable:
Lori, I think it is a great idea. Just make sure you don't put yourself out doing it. I would contact the person who asked you to make the cupcakes and find out the theme of the party, so you can match or at least coordinate with the theme. Since you were told no blue icing, I would do white icing and colorful fondant characters on top, then since you're throwing in the fondant cake, make the cake the focal point with color. This is just my opinion, but i think covering each cupcake with fondant would be more time consuming than to stick fondant characters in buttercream.
Lori - if they don't want just blue frosting, how about making various shades of blue and arranging them in an ombre style around your fondant cake. You could make different fondant accents for each colour .
Also if they want fancy - you could either pipe each colour in different styles (rose, frill, leaf etc) if you use buttercream, or if you go for fondant, then pattern your fondant differently for each colour (quilt, ruffled etc).
I also think your central fondant cake is a great idea - just don't spend too long on it and end up at a loss.