Flannel receiving blankets can often be purchased very inexpensively at thrift stores or garage sales. These flannel (100% cotton) receiving blankets make excellent pre-folded cloth diapers, with very little sewing involved.
First, be sure you're watching for a good deal. Ideally, you should be able to find the used blankets for about ten cents each, and never more than fifty cents each.
Be sure you're using 100% cotton blankets. Receiving blankets commonly come in two sizes, a smaller square blanket, and a larger, rectangular blanket.

Here is a pre-folded diaper made from a smaller, square receiving blanket. The diaper is folded in a "z" shape, with three layers in the middle and one layer on each side. Sew in two straight lines, to hold the fabric in place.

The finished diaper can be folded in half (for a newborn) and then used as a pre-folded diaper.

For an older baby, fold down as much as necessary to make the size of pre-folded diaper needed for your child.

Fold sides in...

...and fold front up. There's the diaper, ready to be pinned on the baby!

Here is a diaper made with a larger, rectangular blanket. Depending on the size of the blanket, your diaper will have three layers in the middle and either two or three layers on each side.

Lay your rectangular receiving blanket horizontally. Fold each side inward, basically folding the blanket in thirds. Overlap the two sides, so that there are three layers in the middle. Sew in two straight lines to hold the blanket in place.

To use this pre-folded diaper (it will be a larger one, since it is made from a larger blanket), fold front down according to the size of diaper you need.

Here is the finished pre-folded diaper!
I have made homemade pre-folded diapers from cotton t-shirts [1], but wasn't pleased with the results. Flannel receiving blankets make excellent diapers, with less sewing involved.
Leave a comment if you have more questions... I'm not sure if this was clear enough but my children just woke from their naps! :)
Visit Crystal's blog [2] for more frugal tips! :)
Links:
[1] http://fernandfaerie.com/sewing_prefolds.html
[2] http://www.biblicalwomanhood.com/2007/04/frugal-friday-hosiery-tip.html