I was looking at a pencil earlier and suddenly wondered how on earth they're made! Fortunately, nowadays, you never have to wonder for long!!
The picture at left illustrates the steps involved in the manufacture of a wood pencil.
It starts with a block of cedar (1) which is then cut into slats (2).
The slats are then stained (3) and grooves are cut into one surface (4).
Prepared leads are placed into the grooves (5) and a second slat is placed on top and bonded with the first (6).
This 'pencil sandwich' is then passed through a milling process (7) to separate the individual pencils (8).
The pencil is painted and finished (9 & 10), a ferrule crimped onto the end (11), and finally, an eraser is crimped into the ferrule (12).
From:
http://www.pencilpages.com/articles/make.htm