The first and hardest part is finding two pictures you can merge together.
#2 Set your transparency so you can see the images over lapping. Move the shapes around to achieve the best overlay.
#3 Using a soft edge eraser start blending together the two images.
#4 Adjust you Brightness and Contrast to blend in with the original.
Funny, you should ask. I just found this really cool looking tutorial that I'm planning to use that covers blending an illustration with a photo.
I think I'll change up that sketch over the photo in the real world step and just sketch on a white layer with a lowered opacity using my Wacom Inutuos3 tablet.