There are a few links to tutorials already, but I figured a few words from an Asylumite who figured it out would help a lot. I realized the basic technique after seeing one of the pictures, and a few tweaks in Photoshop were all that was needed to get a decent rendition of the effect.
Enjoy.
How this works
When you select something, be it an image or text, a type of overlay is used that inverts the selection to show that it's been, well, selected. Using this knowledge, we can then hide a picture in a picture using a simple process.
Simple, no?
In Photoshop, open up a new document and get your images in there, one per layer. Make sure both images cover the entire canvas.
The normal image should be in the top layer and the hidden image in the bottom. Make a copy of the hidden image layer and invert it (ctrl-i). The reason we are using an inversion is so that when the selection overlay inverts the pixels we should get the original colors back, or as close as possible.
Next, on a new layer, zoom in all the way (1600%) and place two black pixels in a row diagonally, one in the top-left the other in bottom right. Select these pixels and the transparent pixels around them. Go to edit->define pattern. Hit delete, and then ctrl-a to select the entire canvase. Go to edit->fill and fill the area with the pattern you just created.
Now, using the magic wand tool, click on one of the black pixels. Make sure that contiguous and anti-aliased are unchecked. Once you have a selection of only the black pixels, click on the inverted hidden image layer and hit delete.
Change the opacity of the normal image layer to about 50% or whatever looks good, and export the image as a gif. It's important that the image be a gif so that you preserve the pixels exactly as they are. jpg compression may screw up the image you so carefully hid.
Uses?
Well, other than a novelty item, I haven't really found a "useful" purpose for this technique but it's fun nonetheless.
