Well, I have gotten tons of advice about this sleep issue. Thank you for all the comments and emails! More is definitely welcome because it is FAR from solved. Tonight we are trying some new things.
A. Both girls will be in their own beds (in the same room).
B. We'll discuss dreams before bed and talk about what kinds of good dreams they'd like to have and then we'll say a prayer for good dreams. Great idea Kelly!
We'll do our usual bedtime routine and put THE blanket on properly and then let her get it back in place when she moves half an inch and it destroys her zen (which is pretty much what we've been doing).
I'll let you know how it goes.