I've made a dozen or so. None pretty, lots of mistakes but all functional to a degree. Lots of fun.
Buy an old Nicholson file or two at a flea market for $1 and have at it. The older ones have good steel. Of course, there are many good steel sources: car springs, saw blades, tire irons, or commercial O1 or 1095 tool steel. O1 is fairly cheap. Ask a local machine shop or spring maker.
Outside shops may even be able to do the heat treat for a fee. Otherwise you'll want a forge (you can improvise a hot fire) for annealing, hardening and tempering though you can soften a file in a toaster oven if left in long enough. If you do your own heat treat, use vegetable oil as a quench when hardening. Works fine and easier to work with than transmission oil in my opinion.
Most of this should be done outdoors.
The basic process is:
1. Soften the steel so it can be worked - annealing. The steel may already be annealed. Most recyled scrap is hardened and needs this.
2. Cut or grind out the shape & drill holes if necessary (profile the knife.) Use hand or power tools, files, sand paper, or sander/grinders. However, get the steel too hot at this stage and you'll ruin it. Quench in water if too hot to touch.
3. Bevel the edges of the blade - again, don't get it too hot.
4. Sand smooth
5. Harden with a very hot source and a quench appropriate for the steel (oil for O1, etc.)
5A. Sand again.
6. Temper with a oven
7. Sand and polish again
8. put the handle on the finished blade
9. Sand & polish some more (do the handle.)
Some of these steps can be skipped and you can still make a working knive. Also, you can add more steps. A lot depends on your patience, abilities and tools. I've left out a lot.
See GreenPete's tutorial on Youtube - http://www.youtube.com/watch?v=5ysKd1cswlo
It's about the best out there for free.
Good luck. Have fun. Be careful - power tools can flip a blade around and into you, so think before acting and wear eye, ear and breathing protection.