Home Distiller

This'll give you some clues:
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Basicaly the wood's heated in a sealed vessel and the smoke bubbled through chilled water to condense.

I've only ever made birch tar which could at a stretch be called liquid smoke, I wouldn't like to use in food though it smells like it'd be ok ( ie. it smells like smoke ).

You can make your own liquid smoke if you have a chiminea. These are the large clay outdoor fireplaces alot of folks like to keep on their back porch.

Build a smoldering fire with whatever wood you would like to use. Wait till any starter fuel used is burned away then add a bundt cake pan to the top of the chiminea. Place the bundt cake pan on the chiminea just as you would place it in the oven if filled with batter.

The bundt cake pan will have an opening in the center for the smoke to rise through. On top of the bundt cake pan place an inverted bowl to make a dome cover over the bundt pan, stainless mixxing bowl works nicely. The mixing bowl should be the same diameter as the bunt cake pan.

Place a zip lock bag of ice over the top of the stainless mixing bowl and it will condense the smoke that comes into contact with the stainless mixing bowl. The "liquid smoke" will drip down and collect in the bundt pan. Now you've distilled your own liquid smoke.

What about the methanol content - we are talking destructive distillation of wood after all. I guess the it's a question of quantity and you're just not going to be using that much - who's going to drink a straight 50ml shot of what's essential tar? ( yeh I know someone will try )

I think methanol would come from fermented wood sugars and not burned wood. And like you said, anyone that can stomach more than a couple tablespoons liquid smoke in the entire meal or bottle of liquor has worse problems to deal with.

The way I make birch tar is to pack one tin tightly with birch bark, knock a hole in the lid and stick a piece of copper pipe in.
I get another tin, punch a hole in it and bury it so the lid is about an inch below soil level, the tin with the birch in gets stuck on top upside down so the pipe leads into the lower tin. Build a fire on top that'll burn a couple of hours then light it.

The tar collects in the bottom tin - it's basicaly condensed smoke. It's about the most basic method you could use and putting water in the bottom tin isn't much of a problem.