In an electric mixer, combine butter and cream cheese and mix on medium speed until light and fluffy, about 2 minutes. Add sugar and vanilla and reduce speed to low. Slowly add flour until just combined. Mix in toasted walnuts.
Divide dough in half and shape into 2-3 logs, 2 inches in diameter. Wrap in plastic wrap and refrigerate until firm. (You can freeze at this point)
Preheat oven to 350º and line pans with parchment paper.
Remove from the refrigerator and let it soften just enough that the finely chopped walnuts will stick to the log. Cover each log with walnuts and slice into 1/4 inch slices and place on parchment paper.
Bake for 20 minutes, until golden brown around the edges, about 18-20 minutes