I love this idea! I have a few shirts I don't wear anymore that were from my pregnancy... I've been waiting for someone to get pregnant to give them away, but this is a cute idea...
embroidery would look really cute!
another idea is to make a toddler dress out of old T-shirts... I've made my daughter a PJ out of two old graphic T-shirts.
Here's where I got the idea:
http://indietutes.blogspot.com/2007/06/adult-tee-to-childs-dress-recon.html
We recycle dad's worn out tshirts as paint shirts or sleeping shirts. They are soooooo big and fun - the arms come down to their hands and they look like robes, but my boys loved them. Easy to find, easy to wash, soft, and holey - the best.