Step 1
Open a new file 700 x 300 at 72dpi. The final file will be cropped to 600200 after the first step, but because the displace filter causes distortion at the edges that would otherwise be visible and unwanted Ive enlarged the original canvas to accomodate for cropping the excess.
The first step is to create a little texture in the jacket fabric. To do this setup your foreground/background colors to #05536b and #10637b respectivly and fill the background with the lighter background color. Add noise (Filter>Noise>Add Noise) at 7% Gaussian Monocromatic and then use the Gaussian Blur (Filter>Blur>Gaussian Blur) set at 1.0 pixels to soften the noise.

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Step 2
Create a new layer above the fabric called Grey and fill it with 50% grey (Edit>Fill and select contents to be 50% grey). We will be using the displacement layer as a filter later and the 50% grey is neutral when the Soft Light layer mode is used.
Add a new layer above the Grey layer called Displacement Map. On this layer we will be painting black and white strips representing the various folds in the fabric. At this juncture I threw in a few guides to help me visualize where my content will go at 50, 375 and 650. I want the feel of fabric without really warping my main element too much.
Paint on the canvas with black and white as seen below. (Remember, this is on a new layer ABOVE the Grey layer). I used a round brush with an edge hardness of 0 in 50px and 90px diameters.

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Step 3
Obviously these lines are much too vivid to create a smooth transition between the folds in our fabric, so Im going to apply a Gaussian Blur (Filter>Blur>Gaussian Blur) of 40 to really even out the tones.
Merge this layer with the Grey layer below by pressing Command+E (CTRL+E on PC) and re-name the merged layer Displacement Map. The displace filter works from an external file only, so save the file in its current state as a .PSD called DisplacementMap.psd to your Desktop or whereve you will be able to find it later.

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Step 4
Hide the Displacement Map layer by clicking on the eye next to the layer in the layers palette and select the Background layer.
At this point we will apply our first displace filter. If your background is still locked (as is the default) double click on the layer and change its name to Background and click enter. This will make the layer a standard workable layer.
Select Filter>Distort>Displace choose 10, 10, Stretch To Fit and Repeat Edges then click OK and navigate to your DisplacementMap.psd file wherever you put it, click Open to apply the filter. The effect will be subtle and you may not immediately be able to see what youve done but going back and forth in the history palette will give you some idea.
Select the Displacement layer we created earlier and make it visible by clicking the empty box to the left of it in the layers plaette. Change the blend mode to Soft Light and the Fill to 80%.

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Step 5
Becuase my final file needs to be 600200 Im going to place vertical guides at 50 and 250 so I know roughly where to place the content. We will be applying the displace filter to the other areas of the file and once weve warped these items we wont be able to move them again because they will be warped to fit their exact location.
Now that we have our basic fabric layed out its time to create our letterman jacket letter. Im using a font called Varsity that is available for free at dafont.com in which the lowercase letters are actually uppercase and the uppercase letters have outlines. Im using lowercase. Set the foreground/background colors to #d38434 and #b66820 respectively and type the large letter using the foreground color (I used 380pt and selected faux-bold to make it a little meatier.) and then rotated it counter clockwise 15 degrees by pressing Command+T (CTRL+T on PC) to bring up the free transform box and then by holding the shift key while grabbing one of the corners and rotating the text to the first snap.
This layer is fabric as well and should mimic our jacket texture so rasterize the type layer by right clicking the layer and selecting Rasterize Type, lock the layer transparency to keep things clean, apply noise just like before Filter>Noise>Add Noise at 7 Gaussian Monochromatic and then add the blur as before Filter>Blur>Gaussian Blur set to 1.

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Step 6
Typically a lettermans letter has 3 layers of fabric, so we need to build two sub-layers that are each a little bigger than this one. Hold down Command (CTRL on PC) while clicking the thumbnail of the current layer to make a selection of its contents then choose Select>Modify>Expand 4 pixels.
With the big "S" now selected, create a new layer below by holding the Command (CTRL on PC) and clicking on the new layer icon at the bottom of the layers palette. Set the foreground/background colors to #014d7e and 043c55 and follow the fabric creation steps outlined in step number 1. Then repeat the same process on a lower layer, epanding the selection 6 pixels from the new layer and using colors #ffffff and #e5e5e5 to get the following result.

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Step 7
Add the following bevel and emboss layer style to each of the three "S" layers but only add the outer glow layer style to the bottom (white) S layer.

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Step 8
With the layer styles applied merge the three "S" layers by clicking on the top one, holding down the Shift key and clicking on the bottom one. With the three layers selected, simply press Command+E (CTRL+E on PC) to merge the layers. Your file should now look like the one here.

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Step 9
Position the big "S" where you want it to sit exactly then open the displace filter again with this layer selected. Filter>Distort>Displace with the same settings of 10, 10, Stretch To Fit and Repeat Edges then click OK and navigate to the DisplacementMap.psd file that we saved earlier. Click Open. Again, depending on your placement of the waves of your fabric, this effect may be subtle here.
Duplicate the layer called Displacement Map and drag it in the layers palette to rest above the big "S" layer. Once in place, hold down the Option (Alt on PC) button while clicking on the line between these two layers to create a clipping mask (or right click the new Displacement Map copy and select Create Clipping Mask).

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Step 10
Things are starting to look pretty good, but weve got more to do. The name of the site I originally designed this header for was Slightly Unhinged, so in that spirit were going to add a new layer at the top of our file and in the same Varsity font, using uppercase this time type UNHINGED (white text about 55pt should do the trick).
Rotate the lettering to match the rotation of the "S" layer by pressing Command+T (CTRL+T) to bring up the free transform box and then by holding Shift while grabbing a corner and rotating 15 degrees counter clockwise. Holding down the shift key while rotating or dragging a transformation constrains the transform, in this case each time it snaps as you rotate youre getting exactly 15 degrees.
Once youve got the text rotated hit the return key to commit the transformation, then double click on the big "T" icon on your new text layer (now called UNHINGED or whatever you just entered into the text field). This will make the text editable and what you want to click is the "T" icon up at the top of Photoshop with the arched line below it which will bring up the following dialog. Change the setting to match, click OK and position the text to your liking.

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Step 11
Our new layer needs the fabric effect we repeated earlier with the background "S" colors #ffffff and #e5e5e5 but first we need to rasterize the text by right clicking on the layer and selecting Rasterize Type from the dropdown menu. Lock the layers transparent pixels then add noise and gaussian blur just as we did before.
Add the following layer styles to this layer as shown below. (*note for a little more realism try using a bevel and emboss setting of 0 rather than 1)

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Step 12
Just like the other layers, this one is laying on the fabric and deserves a displace filter of its own. Filter>Distort>Displace use the setting that weve specified before (they shouldnt have changed in the dialog), browse for the DisplacementMap.psd file and click Open to apply the filter. Copy the Displacement Map layer again, drag it above the UNHINGED layer and Create a Clipping Mask just like we did with the "S" layer.
This ends the official tutorial on the Varsity Jacket but I felt it was missing something so I decided I wanted to add the seam down the middle of the jacket with some stitching and buttons Ill describe this process for those of you who know your way around Photoshop enough to keep up.
I created an arched selection about an inch wide where I wanted the button strip to go with the pen tool then converted my path to a selection and with the background layer selected duplicated the layer to create a new invisible strip above the background. Adding a bevel and emboss with a contour profile and an outer glow in black gave it dimension and it also got its own Displacement Mask clipped to it. The stitching was created by typing a dashed line along the path I created for the button strip in the previous step with added bevel and outer glow in black. The buttons are ovals with a little bevel and a drop shadow. Thats pretty much it. I then flattened and cropped the file to 600px x 200px to get the finished result below.

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