Is there any reason I couldn't use the ATMEGA8U2-AU (TQFP32 package) to make my own Arduino UNO? My intuition says it should be fine, but I'm seeing some pin function exclusions (at least in name) in the datasheet, so I thought I'd check with the forum first...

"I'm seeing some pin function exclusions" Really? Like what?

I would think that if you could program it the same as the Uno, you'd be all set.

Yea I tend to agree. I think it might just be a typographical error in the datasheet at this point, but on page 2 it shows "CTS / HWB..." on pin 13 of the QFN package, but "/ HWB /" (missing the CTS) on pin 13 of the QFP package for example. I very likely am just over-reacting to a typo.

I'm still curious as to why they used the QFN package on the UNO, was it just a matter of a smaller footprint was needed, or was it cheaper at the time / at the production volume,something else?

Yeah QFN is tiny. They could probably have had a less precise, and cheaper pick-and-place machine and use the TQF32 package...

It's also easier to follow the traces, though with the schematics available, I guess that's not a good reason.