I made my daughter the cutiest dresses today all out of shirts I outgrew. I followed this great tutorial http://www.craftster.org/forum/index.php?topic=293063.0 It was fairly easy once I got the sleeves right. I made 3 dresses in under 2 hours. Not bad for a great nap day by my 15 month old. I went through my closet and retrived 3 large t-shirts for this project. 
Some tips from my experience with this project:
Trace out your shirt bodice and sleeves on some poster board to make tracing easier
Use a yellow washable marker to trace on your fabric. It washes out easy and shows up just enough to cut out your pattern.
Try using shirts with v necks or designs on the front of them for add decoration. Maybe monogram or applique the shirt too.
I am going to try them with long sleeve shirts soon.
