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We need to darken the letters a bit so they look as though they are carved into the wood and in a bit of shadow. So, making sure the letters layer (now the middle one in your Layer Manager) is selected, select Adjust>Brightness and contrast.
You will get a selection of thumbnails which give you an idea of what effect they will have on your current image (the centre one, outlined in blue). I clicked the bottom right thumbnail (outlined in red) twice, which darkened the lettering just enough in the wood texture I am using. If you are using a different texture, use your own judgement about which thumbnails to click to darken your lettering just a little.
Now remove the selection, using the Selection menu. It does not matter what layer you have selected when you switch off a selection, because a selection will work on whichever layer is the current one, and will be deleted whichever layer is current. We still have it in the stored selections if we find we need it again. Selection>none only removes the green selection marquee - it does not affect stored selections.
Select the wood layer, right click on it to get the layer menu, and select shadow from the menu.
Set the shadow dialogue box up like this. When you click OK you will find that the wood is casting a shadow down onto the lettering, and beginning to make the lettering look as though it is carved into the wood - but the effect is not complete yet.
  This is where the fun bit starts. With the wood layer still selected, right click to get the layer menu and select split shadow. You will see that the shadow is removed from the wood layer and placed on a layer of its own under the wood.
Select the shadow layer and hold down shift and click on the lettering layer so that both are selected. Right click to get the layer menu, and select Group. The two layers will be joined together into a single object. Because the shadow was above the lettering before we grouped them, it will still be above the lettering. This is what we want, but we could not leave the shadow on the wood because we now want to put a very different shadow on the wood, and you can't have two shadows on one layer. So although we have made no difference to the look of the shadow on the lettering, we have freed up the wood layer for another shadow.
 We need to select a colour for this new shadow. Use the dropper tool - outlined in red above - and click on the lightest colour you can find in your wood layer. I chose a spot in the little red circle for mine. We need to lighten it a bit more, so right click on your colour which has now been placed in the foreground colour box and select Windows Colour Picker.
In the Windows Colour Picker, your current foreground colour is displayed, and right over on the right of the screen is a vertical shade bar with a little arrow to the right of it. Push this arrow up the bar a few positions to lighten the colour, and then OK it.
Select your wood layer again, right click and select shadow from the menu.
Set the shadow dialogue box up like this. If the colour is still black, right click on it and select the foreground colour. Pay particular attention to the shadow direction - we have used down right before, but now we need up left. When you OK the shadow box, the cutout is finished.
If you click on the white layer in the layer manager all the marquees will be removed and you will see the finished effect. This is not limited to text of course, you can do any shape of cutout. The image below is a Listemagerens dingbat. I used a circular selection to copy/paste the centre motif to its own layer above the stone layer, and gave this some contrasting material.
You can use this technique for decoration, buttons, side bars on a web page as I have done on this one, whatever you like. Have fun experimenting with it.
Copyright Carol Brooksbank (Carol UK) 2004. This tutorial may be downloaded for personal use offline, but it may not be distributed in any form, placed on any other website, nor offered for download nor on a cd, whether or not a charge is made for it, and even if I am properly credited.
Anyone wishing to use it for a group class is asked to contact me, so that I can place a duplicate copy on the web for class use, to avoid heavy bandwidth use on my domain.
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