Step 6: Knit the headpiece
Start by determining a section of stitches that will form the top of the head. Center them with the stitches that run along the top of the computer monitor. Place all other stitches on holders. Knit this section of stitches back and forth until it has roughly the same number of rows as stitches (a squarish shape). Now it's time to round down that rectangle. If you're confused by my instructions, try to knit some socks from a pattern, and this will become more clear. A great generic one can be found here.
On a right side row, knit to three stitches past the middle, knit two together, knit 1, then turn the work. Purl 5, purl 2 together, purl 1, turn the work. Knit to one stitch before the gap, k2together across the gap, k1, turn. Purl to one stitch before the gap, p2together over the gap, p1, turn. Continue this pattern until all the stitches are back together evenly.
Time for the gusset. Pick up stitches along the sides of the square flap and join in the round with the stitches from the rest of the unit, including what would normally be referred to as the "heel" stitches: the ones from the turned flap. Knit in the round. You can choose to taper your gussett by decreasing (k2tog on one side, sl2ktog on the other) one stitch on each side of the base of the square flap-side stitches every other row for a while. Again, look at a sock pattern for more clarification.
Knit in the round for several rows until you desire ribbing. Knit in the round in a K2, P2 rib for the desired length, then bind off.