Step 1: Open up a stock image in Photoshop of any size and/or format. The best results for this tutorial usually involve images with many undulating areas of high and low brightness. For this reason I have selected a wavy fabric... although you are, of course, free to experiment.

Step 2: This may seem like an odd step, but save your work, and then save a duplicate of your PSD into a separate file called 'displace.psd'. This will be used later in the tutorial, but for now just close the duplicate and work on your original image.

Step 3: Use the horizontal Type Tool to create a word. In my case I've used the 'Arial' font at size 110. Don't worry if you don't want to use this particular typeface - just select something with a solid look (script-style fonts rarely deform well).
 

Step 4: Right-click on the type layer in the layer palette and select 'Rasterize layer' from the dropdown menu that appears. Then, with the type layer still selected, choose Filter > Distort > Displace from the menu. Duplicate the settings in the image opposite and then select the displace.psd image you saved in step 2.
 

Step 5: And that's it! Your type layer is now displaced according to the relative contrasts of the displacement map. To get a better result, you should now change the type layer blending option to 'Overlay' and drop the opacity to taste. Clean up any over-stretched areas with the eraser tool. You can even add layer effects for added realism if you have the time to experiment.
 

Variations: Of course, this technique is not limited to text objects - you can displace pretty much anything (even complex images), although results do tend to vary.