You start by making your lines. You want to cut off half of the top part. The bottom will be your sheath so you measure it with your knife to see how much room you will need. You then drill holes in the corners and use the cutting blade on any dremel type rotary tool to cut it out.
It then should look like this (I hope the pictures are better than my explanation).
Flatten that side as well.
Doesn't look like much yet but stop by tomorrow for part 2 (too many pictures to put it all in one post)!