It's been a while since I've done this, but I'm looking at one that I did and I think I can answer on how I did it. Not too much involved.
The one that I'm holding is actually a book that I wrote. It's 252 pages and it's sectioned off into 9 clusters of folded 8.5 x 11 paper. Along the crease of each set I used a staple gun (utility style, not office) just as if I was stapling the spine of a zine... only with about 10 staples instead of 3. Pulling them back out leaves 20 holes. Grab your needle and thead and sew through the holes.
Repeat as many times as you need to for your desired page count. Like I said it took nine sets for my 252 pages. I'd break that down but I hate math and I'd rather you do it. Anyway... once you've got as many sets as you want sew them together... looping a new piece of thead throungh all ths threaded spines. Now you just need to cover it. Find a hardback book that you are willing to sacrifice. A nickle-find at a yard sell or in my case, I pillaged the free reject books at my local used book store. A little bigger than 4.25 x 5.5 if you keep the paper the same size... or if you want some thing smalled, find a smaller cover and trim your pages. Scissors would do but I'd reccomend taking advanatge of free use of the slicers at FedEx Kinko's. Even if you don't reduce the size, slicing each folded set with make it more uniformed.
Anyway so then just gut the book, making sure to leave the paper wall on the inside of each cover and the most likely blank first and last page of the book. Then presto... glue your pages in and you've got yourself a book.