What a fun idea! I've sewed a couple of quillows -- one quilted, and one of fleece. I would think that you could either knit the blanket portion and the pillow portion, and then sew the pillow in place (same idea as doing a fleece quillow) OR you could knit the blanket, and on the last row, bind off one side, place center stitches (for pillow) on a holder, bind off the rest of the stitches, and then knit the pillow portion. When pillow is shaped, you would just fold it down and stitch the sides. You can figure the proportions from the free sewing quillow directions -- I'm sure I have some stashed at home if you can't find one. I think about.com has a few. Have fun!
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(start the pillow stitching where the solid line is and stitch to desired length)