Carefully read the directions, and make sure to address the points that it specifies.
Many of the things that are in the project proposal will be included in the final report. You can think of the proposal like a first draft of the final report. If you do things well now, you will have an easier time later. Keep in mind that the final reports are individual ones.
I hate to set a minimum limit on the number of books and papers that you must use. You should be able to determine this yourself since it would vary from project to project. But I find that the class does a poor job of identifying resources for this assignment. Therefore, use a minimum of 2 books and 2 peer-reviewed papers per person. Web-pages can be included, but do not count in the minimums. If you list a paper by its URL, it will be counted as a web-page and not count towards the minimum.
Yes, I expect you to go to the library. Actually, the trip to the library is not the important aspect. What is important is that you do a thorough job of collecting relevant resources. If you want to purchase the books at a bookstore, that is fine. If you have a friend who works at the library and can check out books in your name and bring them to you, that is fine. But you should not neglect a source because it doesn't show up on a Google search. You should not skip a book because you don't feel like going to the library, or because it is not convenient.
You do not have to read everything in your references now, but you should identify resources that you plan to use. The resources should be specific and complete: for a book, list the author, title, publisher and year. Maybe you will later find that some references are not useful to you, and that is fine. Also, for a project proposal, you may identify a source without physically obtaining it. For example, you might read a description of a book and decide that it looks relevant. But if the library has checked it out to someone else for two more weeks, you can still include it. I am looking for a good-faith effort to obtain resources. You may have to order a paper through the inter-library loan (ILL). You can explain the status of the resource in the references section, e.g. "Joe Smith, Example Book, XYZ Publications, Atlanta, 2008. (On order as of March 4.)"
Include a brief rationale, such as "this book appears to be a good reference on ____".
You should use papers from journals and conferences. These are (for the most part) peer-reviewed. Web-pages are not peer-reviewed. You may find papers on the Internet, but this does not mean you can ignore papers not found on the Internet. Often papers do NOT appear on the Internet, since the journal or conference publishes them and may have copyright restrictions. The URL is not a permanent identifier, so do not use the URL to identify these papers; use the original conference/journal citation.
Make complete sentences. Do not present bullet points unless you also "talk the reader through" these points.
Do include pictures, figures, diagrams, equations, etc., but do not simply paste them in your paper. Refer to it in the text. Say where you got it. Write about how it relates to your project. Include a brief rationale, such as "this picture (Figure 1) shows an example game similar to what I am proposing...". Say how it is different.
Equipment needed should include details about the equipment. Do you own it? Do you expect to use what the department has? What is the make and model of the equipment? Are you planning to purchase it? Be specific.
While we are at it, list where and when your team will meet. This can go under the "timeline" section.
Quality counts over quantity. However, you should be specific, and your proposal should be well written. It should not have gaps. Make sure you explain things. It may be clear to you, but you need to write it in enough detail that it is clear to your reader. One good way to know is to have someone proof-read it for you.