The obvious extension is to add profiling capabilities and try to work out some of the Quake II network protocol. Some sort of automated charging infrastructure might be neat for JANET sites.
The current encapsulation protocol is quite inefficient. This doesn't matter much on ethernet (MTU 1500), but is probably pushing it for ISDN and certainly dodgy for modems. Something more compact should be arranged (IP option fields ?).
Cryptographic authentication for clients would be nice: possibly something MD5-driven.
64-bit-cleanness would be nice, so it can work on Alpha.
The server should set an alarm, and boot the client if it hasn't sent its cookie in some fixed time.
Occasionally, servers from whom the proxy has disconnected carry on sending packets, giving errors as they do so. I've no idea why, but I suspect it's because QII isn't checking the return code from recvfrom().
One possibility is for the proxy to act like an infinite improbability shield: detecting world data from the server and sending back move commands so you stay out of the way of anything anyone shoots at you. I'm not sure how difficult this might be, though (before anyone asks, yes you probably should use a game DLL...).