The image above, from the Musgrave Pencil Company, demonstrates the different states of the pencil making process. When looking at a pencil it might appear that wooden dowels are drilled down the middle and graphite rods slipped inside; in reality they’re made in batches on slats of wood and sliced up. Two pieces of wood are grooved with a semi-circular gutter and rods of graphite are sandwiched inside. The glued piece is then divided into individual pencils, sanded and painted.
– General Pencil Co. has a great series of images documenting the manufacturing process.