so I am having a yard sale this weekend and getting teary over watching my 2 year olds baby clothes go to a new home and got to wondering can I cut up his clothes and sew them together to make a quilt? Does it matter what the clothes are made out of? Any suggestions?

I highly recommend that you do not sell them!! You can definitely make them into a t-shirt type quilt. Your squares will be alot smaller and you will definitely need to use a stabilizer but I made a quilt using 40 different pieces of baby and toddler clothes from my 2 boys. I even included a few that had tiny pockets in them. I am starting a second one with slightly older clothes that I am collecting. Some of their bibs had cute embroidery on it and I thought about cutting it out and adding it to the second quilt. You can make it into a wall hanging or lap quilt or even bigger. You don't have to make it immediately either. Alot of people make them for the kids when they graduate highschool.

Search "t-shirt quilts" for more ideas

YES -- you can make a quilt out of his little clothes. I did it for my niece last year and it turned out wonderful!

If it is knit you have to stablize it, but other than that there really isn't too much different. I should look to see if I still have a pic of that quilt and post it on here.

You sure can! If the fabric is a knit, I would stabilize it by ironing fusible interfacing to the back. If it's a woven cotton, treat it like you would any quilt fabric.
A lot of old scrap quilts were made using fabric salvaged from clothing. I just quilted an "oldie"made by the deceased mother of a friend of mine that was made using denim, corduroy, flannel shirting and old fashioned polyester made from clothing scraps.
Have fun with it!

Forgot to mention that the shirts/clothes that have iron ons may melt if hot iron is applied directly to the shirt when adding the stabilizer or making the quilt in general. That was the only snag I hit. Just don't iron on that side.

Yes, keep the ones that have meaning. The little ones grow up too fast. A friend at work kept her daughters night gowns and made a quilt from them. It was just darling.

The heavier knits would make a nice, puffy tied comforter.

Oh, yes you should make a quilt from his clothes. Here is a quilt that someone just posted that she made from her nieces clothes. http://www.quiltingboard.com/t-142950-1.htm