Step 4: Making the Embouchure
Some builders make the hole in one shot by drilling a hole on an angle. I find that this tends of cause more trouble than it is worth for me, so I use a straight hole then shape it afterwards with needle files to its final shape. The most important part of the hole is the blown edge on the opposite side of the flute from the player. This edge should stay as sharp as possible. To get the right angle on the blown edge, I use the needle file to carefully undercut the hole. I start on the interior edge of the pipe where the most material will need to be removed with the needle file held at the angle I'm shooting for. I continue to work the angle back until the entire edge is uniform and cleanly cut.
Start with about 45 degrees between the outer and inner edges. Depending on the size of the tubing compared with the diameter of the embouchure hole, it may not take much to reach the right angle, but it is critical to getting the most out of the flute. More filing is needed on larger pipes and on smaller embouchure holes to get to the correct angle. It may be easiest to go ahead and finish the rest of the instrument so it is playable, and then tweak the blown edge until you can get the best tone and control. But don't get greedy: you can always take off more material later but you can't put more on.
Edit: Thought I'd add a picture to clarify how to undercut the embouchure as I've gotten a few of questions about it. The flute will probably work without any undercutting, but they are much easier to play over a wider range with the right angle and a sharp edge. The blown edge is to the right in the new image. After the hole is drilled (the straight lines), undercut the side of the hole by removing the red material in the image. Make sure the edge marked by B stays sharp and the surface marked by A stays straight and smooth. Don't remove any material from the outside of the tube, only from the inside surface of the hole. After you're done undercutting the blown edge, the tube and hole should look no different from the outside from when you first drilled it.