I want to create my custom linux distro. Should i start with 'Linux From scratch ' project ?
Recently the concept of JeOS (just enough OS) emerged - providing only the smallest set of packages needed to get a GNU/Linux system running. Ubuntu, SuSE and others offer JeOS images of their distribution that can be tailored to build appliances and/or provide building blocks that could still be identified as being Ubuntu, SLES, etc. Novell even offers a web interface for building SLES JeOS based appliances on their machines. Even of JeOS are particularly suited to be run in virtualized environments due to their lightweight nature they can still be used to get something really tailored to a given need. Generally speaking it can be quite difficult to provide the integration that can be found in a decent distro to anything comparable.
That being said there's nothing quite like the experience one gets by trying to get something out from LFS.
I would suggest you to make a Debian Pure Blend. You can read more about it here. You get your customizations plus all the good stuff from Debian. You can use the tools and ideas from the page I linked to generate a Blend of your own.
Other option is using Damn Small Linux or another small distro as basis for a LiveCD or distro.
I would give Calculate Linux Scratch a try -> http://www.calculate-linux.org/main/en/cls