My third year project was the development of a 2D physics engine - you can see videos on Youtube here and here.
Unfortunately, due to some bad design decisions it's not usable as a library for a game, but it was a good project nonetheless.
You can download my source code from my Subversion repository at: http://svn.draknek.org/physics/code/.
Physics and Collision Detection - talk for Warwick Game Design (20/06/2008)
It's looking very likely that this will also involve physics simulation in some way or another.