This is fun! I finally got around to trying it for myself.
You take a t-shirt and cut it into a strip about 1/2" wide. You start at the bottom and keep cutting in a spiral until you get to the sleeves, a pocket, hole, or printed spot. You can get up to some 70 yards of yarn from one shirt. Here are a couple of tips:
Don't use a shirt which has side seams.
I recommend a nice cotton shirt.
If you slip the t-shirt over an ironing board with a slick cover, you can cut on a flat surface, be assured that you are only cutting one layer at a time and spin and cut and spin. It goes easier than if the shirt was in your lap or something.
After the cutting is done, stretch it between your hands a couple of times to make it curl nicely into a sort of tube.
Here is a YouTube video that will demonstrate.
If you don't want to make your own, but wish to use some in a project, I suggest that you shop here. Mike at NorthStreetCrochet makes really nice and even yarn. He is responsible for introducing me to the idea.
You may remember this project I posted about a few weeks ago using this great tie-dye t-shirt yarn which I bought from NorthStreetCrochet.
Here is the yarn I made this week.
And the newest guitar strap I am weaving from some of it.