This is a technique challenge. It's been done before by Natalie in a speed scrap, but not since I was a newbie to the board [so it's been awhile] and we've got a lot of new people since then so I thought it'd be fun to do. In my screen shots, my "layer one" is a blank layer I forgot to delete. Please ignore that layer.
we'll be doing this:
1. pick your picture and your word
2. pick a font that is pretty blocky and in all caps
3. write the word out on your pic and move it till it looks right.
you should look like this:
4. with your picture layer selected, use your marquee tool to highlight the area around the word, taking care to make sure that the marquee is right on the edge of the bottom of the word. If you don't get right up on the word, it'll leave a space and won't flow as well.
5. copy that section of your picture and then delete it from the original picture.
6. paste your copied selection of the picture [so you should have 3 layers. one with the word, one with the section of your pic and the main pic] and make sure it's flowing properly with the main pic
7. highlight the word so that everything but the word is selected [so the inverse of the word]
8. delete this selection from the part of the picture that you copy/pasted
9. delete your text layer and scrap your picture!