I have more or less decided on what I'm going to do for my undergrad capstone project: a router distro with a focus on LAN party software. It will act as a NATting router, DHCP, DNS, BitTorrent, IRC, DC++, and Web server, and possibly some others (XMPP, etc.).
Although I haven't decided what distro I'm going to use as a base, I'm leaning towards Linux From Scratch, more specifically Hardened Linux From Scratch. Hardened is more geared toward routers and other network-edge devices.
I'm also going to draw a lot of package ideas from DD-WRT. I've recently become involved in that project (some wiki maintenance and forum activity) and I'm slowly building toward being able to compile my own firmwares (still a long way off, though).
I should have a wiki up with more of my ideas within a couple of weeks. I'm really excited about this project.