Here's the promised felting tutorial. This tutorial covers felting in an upright washing machine only. For other felting techniques, check out this site.
Start with your finished knitted piece. Tie off loose ends. I personally don't bother weaving them in, because once felted, I can just cut off the loose tail without worries of unraveling.
Throw your knitted piece into the washer with a couple pairs of jeans. Note: Do not use towels! They will lint all over the place.
Set your washer to the smallest water level, hot wash / cold rinse temperature setting, and heavy duty cycle.
Add just a tiny bit of soap to the load.
Check back every ten minutes, restarting the load every time so it doesn't switch to the cold cycle. Once all your stitches have lost definition and felted together, allow the washer to finish through the cold rinse. Set your piece out flat to dry completely.
Add your embellishments and enjoy!