This is the Scorch Shot, a type of flare gun used by Team Fortress 2's Pyro, recently added to the game in the "Pyromania" update. It inflicts only half the damage of the regular flare gun and does not crit against flaming players, but inflicts area-of-effect damage and knockback on hit, and its taunt does nearly lethal damage to enemies at close range.
The handle was cut from an unidentified scrap of hardwood with a line saw and then sanded into shape. The barrel is hard cardboard tubing glued to a smaller piece of wood, which is hinged to the grip with a single wood nail, and the rest is cardboard. I need to find a suitable piece for the foregrip before I can finish this.
EDIT: I used a bit of tubing from an old lego Mars set to make the foregrip. Also made a flare that fits in the breech using some more tubing and bottle caps.
EDIT 9/26/12: The much requested finished version! The gun and flare were painted with acrylics: N4 Neutral Gray, Iridescent Stainless Steel (Fine) and an unidentified orange i borrowed while at the summer camp i work at. The flare would be team-colored in game, but as the weapon itself is not I figured no one would mind.