Ctrl+Click rim cut’s layer thumbnail to create a selection. Expand selection area about 2px wide by going to menu Select> Modify> Expand.
Use Filter>Render> Clouds menu to fill the selection with cloud filter. Not satisfied with the result? You can repeat the clouds filter by pressing Ctrl+F.
Deselect with Ctrl+D when you’re done.
Use Burn and Dodge tool to manually define shadows and highlight areas in the cut texture layer. Make sure you pick Range: Midtones and use low Exposure value for both tools.
Still in the cut texture layer, add grainy noise to it by using Filter> Noise> Add Noise. Set the Amount: 2% and then OK.
Blur the noise using Filter> Blur> Gaussian Blur with radius value around 0.3.
The ‘hole’ inside the circle need to be fill with texture. Select it easily using Magic Wand tool (make sure the sample all layers option was checked!).
As like the previous steps, expand the selection around 2px value.
Add new layer beneath half head layer, name it ‘head texture’. Use the Cloud Filter again to fill the selection (notice that we’re still using the same foreground/background color as before). Don’t forget to deselect when done.
We will use gradients and filters. Click “Add a layer style” small icon in the bottom part of the Layers Palette. Apply “Inner Shadow” and “Gradient Overlay” styles. Use setting and colors just like on the screen shots below.
Inside the Inner Shadow setting, change blend mode to soft light, increase Distance and Size value.
While in the Gradient Overlay setting, set the gradient color to black and white, select multiply blend mode, increase Opacity to 80%. Make sure Angle is set to 900 and the Scale is increased to 116%.
We need to add inner shadow inside the cut texture. To do this, add Inner Glow layer style for the cut texture layer. Why not use Inner Shadow but Inner Glow instead? I personally like the softer result from the inner glow layer style, and it was easier to control. Follow the instruction in the image below and you’ll be OK.
Apply Drop Shadow to rim cut layer. Use grey as the Drop Shadow color. Select Color Dodge blend mode, set Angle to 900, adjust Distance: 1px and Size: 5px. By Following this setting, you will get a nice highlight color beneath the rim cut.
Create new layer beneath rim cut layer, name it ‘shadow’ and set Multiply as the blend mode. Ctrl+Click on the half head layer thumbnail to create a selection. Next, hold Ctrl+Alt+Shift while clicking half head layer mask thumbnail. This action will intersect both of the selection.
Inside the selection, draw shadow in the marked area. Do this by using black soft round Brush tool with low opacity, and make sure you draw it in the shadow layer.
We’re done with ‘creating a hole in head’ parts. We need to pay attension with the background now.
Open up the cloud image. Go to Select> All and then press Ctrl+C to copy it to clipboard.
Paste the image into our scene, you may rename the layer to ‘cloud’ or something like that. Select and show background layer again. Using Free Transform (simply press Ctrl+T), set the position and size of the cloud so it will cover ¾ of the background area. Press Enter to confirm transformation.