This idea comes from Family Fun and I tried it with my daughter’s outgrown jeans.  The jeans had pretty embroidered stitching and I hated to see them go, so I thought I’d give this a shot, and it worked pretty well.  
Basically, you cut off the legs below the knee, open the inside leg seams, and then cut up to about an inch below the zipper, and then on the backside, cut about five inches below the waist.  (The directions say seven inches for the backside, but for me that was a little long; use your own judgment on that.)  Then you use the leftover leg material to fill in the spaces in the front and back.  I used fabric glue (I don’t sew) and applied pressure to make sure it dried flat.  I didn’t make a hem, because my daughter liked the frayed look.  It’s pretty cute, and hopefully holds up in the wash!