Today I’m going to treat you guys to a short and simple Photoshop tutorial, and we’ll be using vector mask to create custom-shaped pictures. I’m just going to pinch a few pictures on Flickr that are on the “Creative Commons-licensed content for commercial use, adaptation, modification or building upon” and we’ll be on our way.
I’ll be using Photoshop CS3 for this, but you can use any version really.
Just to be clear, our objective here is to achieve a custom-shape picture, for example:

Custom-shaped image, transparent background
Step 1:
Select an image you would like to use as the internal image. I have selected this:

Image that will be used as the 'internal image'
Step 2:
Select the custom shape you would like to use. That’s ‘Custom Shape Tool’ on the toolbar. Don’t forget, there are hundreds or even thousands of free custom shapes available for Photoshop online. For this example, I have selected a flower.

Select a custom shape using Photoshop's Custom Shape Tool
After creating a shape, this is what you should see on the Layers window:

Appearance of Layers window after creating custom shape
Step 3:
Make a copy of your current background so you can modify it. You can do this by dragging the background layer to the ‘Create a new layer’ button:

Create an editable copy of your background image
Your Layers window should now look like this:

Appearance of Layers window after creating a copy of the background image
Step 4:
On the Layers window, drag the vector mask thumbnail and drop it on the background copy:

Drop the custom shape's vector mask thumbnail on the background copy
Disable the shape and original background’s visibility (click on that thing that looks like an eye). Your Layers window should now look like this:

Disable shape and original background visibility
…and your canvas should now display a custom-shaped image!

Other random examples using the same technique:
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Woah, cool tutorial. I’ve never really thought of this one.!