Thanks, everyone, for your nice feedback!
Queen Gueneviere, to answer your questions, SWS does change colors as you go. I've never posted a tutorial before, but I'm writing up what I did below. Feel free to ask me questions if it isn't clear.
This was my first entrelac project, and I found it to be amazing and rewarding.
4 balls SWS in Natural Geranium
Size 8 addi needles
Using the pattern for knitty's Danica, cast on 50 stitches instead of the recommended 20. Knit until you have a length you like for your bag, plus about 3" for a flat bottom. Bind off as directed in the Danica pattern.
Seam up both sides of your bag on a sewing machine (I was afraid to do this, but the woman at the fabric store told me it would work), and flatten the bottom by going across this seam for about 3". Sew a lining to match (I used bright pink silk that I got on sale- see picture) and seam this in the same way, with the 3" of flatness across the bottom. (so it hangs like a hobo bag- see picture)
I used plastic mesh (cut to 3" wide) to reinforce the bottom, and sewed it in place with 4 big flat buttons on the outside of the bag, to make little "feet" for the purse. I installed a zipper in the lining, then sewed a double length of hatmaker's grosgrain to the outside of the lining for the strap.
I then machine stitched the lining to the knitted portion of the bag, holding the bag open, sewing just below the zipper all around, making sure the knitted fabric reaches just a little over the zipper to hide the lining. (You can see this seam, but it somehow doesn't bother me too much). This also catches the strap between the lining and the knitted part, which reinforces it some.
I added a bow from my leftover ribbon and an old rabbit fur hair tie for the zipper adornment.