First, pick out a fun book (I headed to the bargain section at B&N)
Scan in a clear picture of the character. Crop it and make the background transparent. Sometimes this is easy, sometimes it takes a lot of time with you, your mouse, and the eraser tool in your photo program. I think its worth it to have a clear background though.
I try to put as much stuff on each page as I can as they are a little pricey.
Choose the fabric you want it on. I chose to iron it onto white fabric and then add that to the shirts and bags as a sort of patch. Iron any wrinkles out of the fabric and remove any lint, string, etc. before ironing on the picture. Follow the instructions on the package for the iron-on paper.
After this I trimmed the fabric and sewed around it a couple times. I decided I wanted to have the edges fray. You could always turn under the edges if you want.
Then its just a matter of sewing it on! I stocked up on these t-shirts this fall on clearance at Target (96 cents!!!). I would have rather used heat-n-bond to attach this, but I didn't think it would be a good idea to iron over the picture.
The book bags are simple, unlined, with serged seams on the inside.
And there you have it. Hope this gives you some ideas for gifts for the kids on your list. I've already got plans to make a couple more for some little girls!
P.S. It's possible I may have some copyright infringement going on here. So, don't try to sell anything like this. I'm hoping this gets the kids really excited about the books, so hopefully the author wouldn't mind too much.