I'm knitting a baby sweater right now, for a former student and friend who is expecting her first in about 6 weeks. And EVERY TIME I get out those impossibly small needles to make a present for a friend, I SWEAR I will never do it again <img src="/images/graemlins/smile.gif" alt="" />! This one is a lovely fair isle cardigan from one of Debbie Bliss's children's books. I'm using a cotton/tencel blend, and it's just lovely, but oh, those stitches and rows are soooo tiny! I keep reminding myself that I bind off for the armholes at all of 7 inches though, so the fact that I've only gone about 3 1/2 inches means I'm halfway there.
Regarding the question of whether to hand-knit for people's babies, I can say that I LOVED the hand-knit things I got for my kids, but then again, I'm a knitter, so of course I would. My other piece of advice, and it goes for clothes, too, is to knit bigger sizes. You always get TONS of little bitty clothes, that they outgrow in like the first 3 months, so things that can be put away for awhile were oh, so appreciated. The sweater I'm knitting should fit baby bean at like 18 months.