If you can't bring yourself to cut the baby's clothes, here is a link to a blog of a quilter who made one without cutting up the baby's clothes. It was very cute and I am sure it would mean so much to the parents done this way.
http://www.justsewyallknow.com/2011/...hes-quilt.html
Unfortunately the link she provides doesn't work but I bet you could figure out a way to sew the entire outfit down.
here is another
http://quiltsbynannyb.com/PhotoGallery.html