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PhotoImpact doesn't have a built-in Cut-out Effect. This tutorial will show you how to create this using Selections & Shadows.

What you will need:

PhotoImpact 8 or higher
My Screenshots were done in version X3, but will be similar to older versions.

A NOTE About Different versions of PI:
You should be using Standard Mode or Full Edit (or your custom mode based on one of these), depending on what version of PI you have. If yours doesn't have either, then you don't need to worry about it.
If you are using 11 or higher, you will find things have been moved around. I have tried to correct all of those in the text of the tutorial, but just in case I miss something... The FORMAT menu is now devided between PHOTO and ADJUST. For the most part the division of things is logical. Resizing an Image is under ADJUST, Blurring an image is under PHOTO and so on.

Part One - The Cut Out Shape
  1. Open a new blank RGB image about 300x300 pixels.
    Flood fill with any light solid color.
  1. Grab the Path Tool and set up as follows:
    ♦ Color - Any Color will do.
    ♦ Shape - any bold shape. A diamond or fancy circle, or even a fat flower will work nicely.
    ♦ Mode 2D Object
    ♦ No Border
    ♦ No Shadow
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  1. Draw out your shape. Try to take up about two thirds of the space available. Right Click on the shape and choose ALIGN/Center Both.
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  1. Now change the mode from 2D object to Selection.
  1. Right click and choose Invert.
  1. Right click again and choose Convert to Object. Do NOT deselect.
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  1. To begin to create the cut-out effect go to Object/Shadow and use the following settings:
    ♦ Color Black
    ♦ Shadow direction - down to the right
    ♦x-offset 5 pixels
    ♦y-offset 5 pixels
    ♦Transparency 25%
    ♦Shadow size 100%
    ♦Soft edge 15 pixels
    Then click OK. YOu now have a dark shadow inside a hole in the shape you drew. But the effect is not yet complete.
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  1. Right Click and choose Split Shadow.
  1. Go to Object/Shadow again, but with the following settings: ♦ Color White
    ♦ Shadow direction - Up and to the Left
    ♦x-offset 1 pixels
    ♦y-offset 1 pixels
    ♦Transparency 25%
    ♦Shadow size 100%
    ♦Soft edge 2 pixels
    Then click OK and then press the Enter key to deselect.
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Part Two - the frame

  1. Grab your Path tool again and this time choose Frame shape Fr48. If you don't have this shape you can download it by clicking here. You will need to unzip it then open it in PI. Once open you can drag it to your Easy Palette and store it in "My Library". Then you can find it when you choose Custom Shape/My Library/Fr48
  1. Now hold down the Shift key and draw your frame diagonally from top left to bottom right across your image. This will make it come out as a square which is the shape of your image. Do not try to center it and don't try to make it fit the entire space. You need room for the effect to work.
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  1. Right click on your newly drawn frame and choose Arrange/Bring to Top. If you don't your frame will seem to disappear when you go to the next steps. You need it to be at the topmost layer for the cut out effect to work.
  1. Repeat Steps 4-9 above.

Part Three - The Text

For the text you can't repeat the shadows with the same settings. The area you are cutting out is to narrow for it to work. So please follow the steps below with the new settings.
  1. Grab your Text tool and choose the Comic Sans MN font. Set up as follows:
    ♦ Any Color
    ♦ Size 32 Pixels
    ♦ Style Bold
    ♦ Align Center
    ♦ 2D Object
    ♦ No Border
    ♦ No Shadow
  1. Now Click in the center cut out area and type Cut and Enter, then Me and Enter and then Out.
    Do not deselect your text.
  1. Right click and choose Align/Center Both.
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  1. Grab the Text Tool again and change the mode from 2D Object to Selection.
  1. Go to Object/Shadow again, but with the following settings:
    ♦ Color Black
    ♦ Shadow direction - Up and to the Left
    ♦x-offset 2 pixels
    ♦y-offset 2 pixels
    ♦Transparency 25%
    ♦Shadow size 100%
    ♦Soft edge 2 pixels
    Then click OK.
  1. Right Click and choose Split Shadow.
  1. Go to Object/Shadow again, but with the following settings:
    ♦ Color White
    ♦ Shadow direction - Up and to the Left
    ♦x-offset 1 pixels
    ♦y-offset 1 pixels
    ♦Transparency 30%
    ♦Shadow size 100%
    ♦Soft edge 1 pixels
    Then click OK and then press the Enter key to deselect.
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Below are more examples of "Cut Me Out!"