Cut-Outs

Depending on your size font or whatever you will be cutting out... you can very these specifications.
Open your image... and increase the colors to 16 million.
This is one way of doing it that works well for me.
(I'm working with a graphic size image 350x350. Just so there will be a big enough space to play with.)

Use your marquee tool and create a box area almost the size of the graphic. Keep it selected (marching ants on).
Go to effects>3d effects>Cutout. Do your settings something similar to this. Vertical=1 Horizontal=1 Opacity=56 Blur=12.5 Shadow Color=Black Fill Interior With Color is Checked. I used this color- #D7CBD7 -but doesnt matter what color you use. (Lighter colors are best.) Deselect.
You should have something that looks similar to this.

Now make another selection with marching ants on... make this one a little smaller and longer.
effects>3d effects>cutout. Do your settings the same or similar to what you have already done. Change the fill color. I used this color this time. -#CAD4D8 -
This is what mine looks like now.

Keep doing this making several different sizes of shapes... the settings dont need to be much different than this.

Now for smaller stuff...
Start again with a 350x350 image.
Lets try letters. I like to use Impact font. Lemme know if you need it.
Your letters are white... we are gonna do 20 pt size right now. Antialias and floating are checked.

Keep your marching ants on... effects>3d effects>cutout.
I wouldnt go more than 5 for the blur on this cutout.. but you can play with the opacity to your liking. I have mine on 66.
Go to your layers palette. Right click on the floating layer, there will be a pop-up menu. Choose convert to raster layer.
Now you can go further with this and add a drop shadow and make a totally different effect. Like gel or candy looking letters. Otherwise, it looks like they are cut out.

That's pretty much it. You can play around with the settings to your liking, but those are the basic settings that i have used.
Let me know if you need further instructions on this. GOOD LUCK!! *s*