Open a new document (make it 640 pixels x 480 pixels at 72 ppi) and create your text. A large thick font (like Impact) works best for this type of effect. Size it to fill up your canvas.

Open the image that you want to have appear inside your text. This image should be a similar size and resolution as your text document.

Using the move tool, drag the image onto your text document. It will appear on its own layer which should be located above the type layer in the layers palette.

Make sure the image is directly above your text by lowering the opacity of that layer to 50%. Now you can visually resize the image by using the free transform command (PC: control + T) found under the “edit” menu. Hold the shift key, grab a corner point and resize the image to the appropriate size.

Once positioned, raise the opacity for the image layer back to 100%. Go to the layer menu and choose group with previous (PC: control + G) to clip this image into the letter. You can use the move tool to position the image within the letters.

Add a drop shadow to the text layer to accentuate this effect.