The source images I used are in  noway mine, neither do I take the credits for them. They were just random images from google search.

Well, the image in the middle is my final image, the first one being the texture and the third one being the source.

Open the source (Image 3) in Photoshop and paste the texture on a layer above that, and set its blend mode to ‘Luminosity’.   it should look like this :

Now, click on the ‘Create Mask‘ icon (Bottom of the layers palatte). Select the mask arena, and with a soft round brush, with a selected color of black, paint around the part of the layer that goes outside the yarn visible from the bottom layer.

Now duplicate the texture layer (alongwith the mask) by right clicking on the layer in the layer menu and selecting ”duplicate‘. Now add blending options by right clicking on the third layer on the layer palette and selecting ‘Blending Options‘. The blending options dialog box opens up.  Add the following settings on the blending options dialog box.

Now you can see the glow around part of the image. Now we are going to use the same trick to add eyes, etc. Select a soft round brush of appropriate size, and color white and paint around the places on the mask so as they resemble as eyes and mouth.  The main part of the image is complete.

The actual smiley we wanted to create is complete, but you can always add a few more effects to add depth or looks to the image. What I did was duplicating the layer, and erasing off the mask leaving some area for hair and setting blend mode to multiply, then again duplicating the layer and setting blend to ‘lighten’. It gave me a good effect for the hair, and my final image is like the one you can see in the beginning

Here is how my layers palette looked at the end :

And finally , Let your creativiti run wild, and best of luck, lets see what you come out with. A candle on this cookie might look very good. You can post your own images here in the comments. Enjoy, Have fun