Oh, GREAT--more knitters joined the conversation.  I'm reluctant to join any more forums because I already belong to so many (knitting/jewelry/sewing, etc) and reading my daily digests is taking up half my day. 
Wanted to comment that M1 K1 means Make 1, Knit 1.  This means you are increasing a stitch on the row every time you Make 1.  You'll find out there are many techniques for trying to do each thing in knitting--and no one right way.  Some people M1 by lifting the bar inbetween stitches and knitting that.  Others knit into the front and then into the back of the next stitch to add the extra stitch to increase the row.  I use this method.  There have been plenty of suggestions in this thread for books and online websites that teach basics.  If you want to knit that cute hat, I think I would start with only making it 2 colors (forget the design for now) and learn the basics.  You can always redo it a second time, this time with the intarsia (which is what the design/color change is called).
Jun3machina:  Since you work at a fabric store, are you more into sewing than knitting?  I'm also into sewing but really would just prefer to design and have someone sew the stuff up for me as I've got highly advanced design ideas and only intermediate skills. 
I'm participating in a craft fair this weekend and am in a frenzy trying to get all of my products tagged and ready, plus we're working on building more girds for my booth (this is only our 3rd show).  The booth is looking quite professional but has cost a small fortune in supplies, time and effort.
Knowing how moms and grandmas will spend anything on kids, I just completed these baby booties and little matching pouch to store them in.  I'm trying to decide what to charge.  It's both knitting and crochet. I'm really not into knitting baby clothes, but if it will sell, I'll learn to love it. 
