It really is done with a file. Not the usual file like a Nicholson handy file. you use needle files, they're shorter with very thin profiles. You can get round, square, triangle, half round etc. You make a pattern of cuts on the edge of the tang/spine to sort of releif carve the image you want.
A lot of work is done with a dremel now also, but most folks use the files for a good bit too. I use a mix most of the time doing rough work with a cut off wheel or sanding drum in the dremel and then switching to files.
The best explanation you could find would be Bruce Evan's filework tutorial, has a lot of good pictures explaining how its laid out and how to do a few different patterns. I don't have the link anymore, if I find it later I'll post it. Otherwise, if you go to one of his posts there should be a link to his website and you can find it from there.