I'm overwhelmed by the number of sweet comments on the bag - thank you! A (spottily) illustrated guide to finishing a bag the way I did follows:

Instead of knitting the side panels straight, I decreased to make a sharply sloping piece - I picked up the directed number of stitches, and decreased one at either edge on the fifth row and every fourth row thereafter for 61 rows. I did knit a hem of five rows, and sewed it down.
After felting, I blocked the piece over a padded portfolio that happened to be just the right size and shape. The first time (pictured above), I didn't get everything perfectly, and ended up reblocking it later to straighten seams and pull out irregularities. For such a structured bag, it's worth it to get the shape exactly right.
I cut four pieces of heaviest-duty craft interfacing

and quickly whipstitched them into place.

Then, you need one of these things - a spring punch fitted with a 1/16" (00) tip - to make holes that run the entire length of a 72-inch leather strap.


I sourced the strap and the tools from Tandy Leather, a huge retailer with lots of stores as well as an enormous mail-order and internet operation. The troll-ish little man who sold me my wares tried to insist that I also purchase a groover, for marking the stitching line, as well as an overstitch wheel for marking the hole locations, but I (apparantly) commited leatherwork heresy and just eyeballed it for the short length I had to do.
The strap itself is just a 3/4" (that's the width of the buckle it takes; the actual strap is about an eighth of an inch narrower) strip of 6-ounce latigo leather. Punching the holes is really easy (and strangely satisfying), though it certainly takes time.
I sewed the two ends together to make one long loop, laid it out this way:

and put the bag on top, to get an idea of where the handles should begin and end, where the straps would turn the corners, and where the feet should go.
I psuedo-rolled the portions I'd marked off as handles:

Rolled handles are typically done with MUCH thinner hide, wrapped around a core of cotton piping or the like and sewn with a machine. I just saddle-stitched the two sides together, pulled as tightly as I could, and forced the center into a round shape. It would have been a lot easier with a clamp of some kind, but I rigged up a system with a pair of pliers and rags wrapped around my hands to protect them from the waxed linen thread. It worked tolerably well, even if I did look like some kind of deranged, leprous little match girl.
Here's the hardware I used:

Two-part magnetic clasps from JoAnn, and nickel 1/4" round spots from Tandy. Both are the simple-installation type with prongs that just need to be inserted into two tiny slits and bent over to secure.
I attached four spots for feet in the places I'd measured, and sewed the strap to the bag body using a simple backstitch. I basted in a guide of contrast thread, first, in the exact place I wanted the outside edge of the strap to run:

To sew through the interfacing without resorting to a pair of pliers, you really need a glover's needle, or some other kind of needle with a sharp, wide point. During strap installation, I tried to focus on the consistency of my stitches - I wanted to pull the thread tightly enough that it sunk into the leather a little, but not enough to pucker it or the felt. Even with concentration, I found that the bag was a little shorter along the sewing line - about 1/4" - than anywhere else. That was fine - just sturdier, as far as I was concerned - but I did make a point to sew in the same direction (bottom midpoint to top edge) for all eight seams (two for each strap), to keep any and all gathering going in the same direction rather than pulling in opposition.
This is the inside of the bag after it was done:

Now, I'd originally intended to add interfacing just once - the point was to give stiffness to the felt and to make it a little tougher for seaming - but I found that the felt kind of rippled and puckered where things had been pulled slightly out of joint by my imperfectly tensioned sewing. I cut out the interfacing on the wide panels, leaving only the strips where it was sewn into place, and added new, better fitting panels.
I made my closing flap, and put in my magnets:

The flap (not pictured) was made of a small piece felted along with the bag - fifteen stitches wide by thirty or so rows, worked with two stitches of moss stitch at either edge to prevent curling. I took a snip of lining fabric, wrapped it around a piece of interfacing cut to be just a little smaller than the felt, and installed the male magnet to it. Then, the piece was machine-sewn to the felt rectangle, and the whole thing backstitched to the back of the bag with more waxed linen.
Almost done now! I'd skipped the bottom facing, so I made a cardboard bottom insert with a piece of extra-heavy chipboard, cut just large enough that it would fit tightly into the bottom. I covered it with interfacing:

And stuck it in. It was amazing, how it seemed to square everything that was a little bit cockeyed, and made the whole thing seem straighter and more solid all at once.
I figured out the shape of my lining:

Cut all my pieces:

Made a zippered pocket with the help of this clever little tutorial, and whipstitched the completed lining to the bag. It's kind of a clumsy solution, but I didn't see any other way to do it. The thread sinks into the felt, and closely matches the lining fabric, so it's not too clumsy. The lining is a little bit too big in the bottom (enough to bunch a bit in the corners), but it fits absolutely perfectly at the top, so I'm happy.
Things I learned from this project:
- I loathe pictoral intarsia. Blocks of color are fine - even argyle patterns can be fun - but I hate, despise, abhor this garbage about cutting a new length for three stupid stitches five over from a block of the same color; I dislike not being able to easily estimate how much thread you need; I detest the general sloppy and imprecise nature of it. I would never do a project like this that wasn't felted to hide gauge problems.
- working with leather is probably a lot of fun...if you have the right tools. Then again, working with leather probably isn't ALL that much fun, judging from the staff at the store - hotboxing Bronco 120s inside a teeny, cramped, stuffy little storefront and laughing immoderately at the poor guy who sliced his hand up trying to follow their instructions
- sewing is not for clumsy people; neither is ironing
It was worth it, though. I think.
Oh - I'd forgotten - I received my invitation for the shower that the Baby Fair Isle was meant for. I've learned a lot about Fair Isle since I stopped working on it, and the sloppy math of the original design kind of annoys me now - no big deal, right? I'll refine it, and be glad that there isn't much actual knitting involved. Except, uh, the shower's on the seventh of January, and I get back from a week of diving in Puerto Rico late on the sixth. Crap! Preemptive yarn-ing today, and hopefully I can get it done in the week after Christmas.