Update from 2011: FontCapture is no longer free, or possibly the author has retired it and pointed the domain at YourFonts. You might like to try MyScriptFont instead before it also becomes a victim of its own popularity.
Easier (and cheaper) than it used to be, thanks to www.fontcapture.com — a project created by Hakon Bertheussen that works on the principle of printing off a grid, writing onto it and transforming a scan into a TrueType font. This is a free online tool, so it's limited by how long the author wants to keep the site available, but there are a few pay sites working on the same principle for around $10-15 and pricier offline alternatives include Scanahand by High Logic and ScanHand (very original names, these) by FontLab — but where's the fun in that?
There are a few drawbacks to the grid method. It's very easy to end up with letter sizes that are out of scale with each other, and the tool only converts some of the characters you might need to make a font that'll work reasonably well with, say, Microsoft Word's "Replace text as you type" functionality. However, it's a very good starting point to produce a font that can be edited to fill in the gaps, and FontForge is a nifty free editor that'll enable you do just that. I seem to remember that the last time I looked at this (a good few years ago) the only way to get it running was using Cygwin, which essentially emulates enough of Linux to let software run under Windows without significant rewrites, and is a chunky download. Fortunately now someone's come up with an alternative single package that doesn't require fiddling.
Editing is reminiscent of using !Draw under RISC OS 3, which added a nice retro feel to the endeavour. An hour or two into the process I began to regret filling in the grid with a fine point Sharpie, since it came out thicker than anticipated. As I'd already spent some time adjusting letter sizes and adding characters and didn't feel inclined to do it all again in biro, I used FontForge's "Change Weight" function (set at -50em) to make a 'light' version of the font once changes were mostly otherwise made.
Those interested can compare the original generated font with my initial edit and the thinner version I settled on. Feel free to use for personal tinkering but please don't take and rehost the files — that'd be a bit creepy. They're just intended as an example of what's possible.
Of course, there's no hinting to make things look smoother on screen whilst editing text, but bitmap editors such as Corel PhotoPaint will perform their own anti-aliasing and the same is true for PDFs made with things such as Bullzip PDF Printer. Other projects could include dingbat fonts for frequent doodles, or common bits of text such as a signature, 'Hello!', etc. Potentially you could also put together fonts from existing samples of writing for people wanting a font for regular use (such as those who've developed reduced motor control), although joined-up writing poses considerably more of a challenge and ideally would want variants of more common letters to permit more natural-looking results.