I'd put 7.1 Pro on it and basically do anything you could have done with system 7. There are a lot of good games from that time period, there were some really neat ideas in desktop productivity software (things like publish and subscribe, which beachycove mentioned) plus PowerTalk on 7.1 and 7.5, if you have multiple machines and a localtalk or ethertalk network.

I really wouldn't bother overclocking it, because if you're going to do that, you may as well just grab a 575 board. Putting the board into a Color Classic is an option, but that really depends on if you want the smallest possible system, and want to deal with the lower resolution of the color classic's display.