I knit a tiny newborn size hat for my incoming niece:
Between this and the pirate hat, she'll easily be the coolest baby in Portland, which given the hipster population of Portland is really a meaningful title.
The hat was made on #5 dpns with scraps of Zara from baby projects past - the beautiful green is, alas, discontinued. I used the proportions of the hospital hat that db wore right after she was born - basically, I cast on 70 stitches and knit random stripes in the round in a 1x1 rib for 3.5 inches; I then switched to stockinette and reduced as follows: k8, k2tog for one round; knit one round; k7, k2tog for one round; knit one round; continue in pattern until you reach k4, k2tog round, at which point eliminate the knit rounds. When only 5 stitches remain (you'll have to improvise at the very end since the pattern of reductions only gets you to about 8 stitches at the end - for the final round, I think I k1, k2tog to get the final stitch count down to 5), change colors and knit about 1.5 inches of i-cord.
The flower itself comes from this Knitty pattern: http://knitty.com/ISSUEfall07/PATTflowerpower.html
Having a baby has given me great insight into the uselessness of most baby knits - I can't imagine a newborn hat staying on unless it's knit in 1x1 rib and for slightly older babies, unless the hat ties under the chin, I don't see it staying on, either. Or maybe my hat-despising daughter is exceptional (well, of course she's exceptional in every way...) and she's given me a warped perspective on babywear.
Together with the pirate hat, I think this is a great gift, which is to say a gift I'd like to receive. It's amazing to look at the tiny flower hat and the pirate hat together - babies' heads really do expand at a disturbing rate during the first three months. The only thing that immediately strikes me as more disturbing (crossing my legs as I type) is the thought of pushing out a three-month-old size head rather than a newborn-sized head.