Cutout Text

This was my beginning image (BASE IMAGE).  It measured 300 X 150 X 16.7 million colors with a transparent Background.  I used the following for my colors. Foreground was RED, background was WHITE.

I then opened the file found here named grainsmooth.psd (a friend sent this to me who got it from a woman named Thumper) On the colorfill layer of the grainsmooth image, I used windows red and filled the image which gave me an image like this one to your lower left.

Once this was done, I clicked the control pannel (to your right) for the paint bucket and selected a pattern fill.  Click on options, and select grainsmooth from the drop down menu.  Now, fill the your image.  It will look like the one to the upper left.  The upper right shows the layer pallet of the grainsmooth image.  Make sure that the color fill layer is selected before pouring any color into the image.

Now, make a new layer and name it Lettering. Using your text tool, and the same color you used to fill the color fill layer of the grain smooth image, make some text in the center of the image.  I used Theresa with Volante ttf and my point size set at 36? I think. Deselect the text.  Now, click on Image --> Cutout.  Make sure your fill image is ticked.  Select Foreground color for both  interior and shadow color.  Opacity is set to 100, Blur to 3, and both vertical and horizontal offsets should be set to 1.
Once I have done the above, my image looks like this one here below.  I know, the cutout is awefully red, but you can experiment with the colors to find one that matches better.
Now, it is time to make the image look like it has been cutout.  Select Image --> Effects --> Drop Shadow.  Choose the settings as I have done here.  Color is set to Background color, Opacity is set to 100, blur at 2, Offsets are both 1.  Hit OK.  Your image should now look like the one below.