I learned to make the felt frame ornament through the excellent instructions from Magic by Mona that were found on the Lizzie*Kate website for the Blessings of Christmas series. I've modified those instructions a bit in this finishing slideshow.
This method is not for needle and thread purists! It uses quite a bit of glue and an interfacing with adhesive. It is a rather quick finish, though.
This ornament has three layers, the frame, the stitchery and the backing. I used a wool felt for the backing and frame fabric.