alexpooh: If you really want the shadow gone (I'd leave it in myself, but tastes differ
), I suggest you do what I suspect Mainah_Ayuh did above - use the clone tool and paint over the shadow with lighter parts of the tree trunk, or just cut and aste pieces from the lighter parts over the shadow. It will take work to get it as flawless as I suspect you want it though, so be warned! David's method might work too but in my experience it's harder than you think to get a good colour match that way.
Regarding the tree knot I think your result looks good, only you can decide if it's realistic enough or not. I would probably have rotated the wood so the grain runs vertically and I would prbably have done a slight curve bend on the text to make it look more like it was written on a round surface. In the end I would have made the outlines of the hole in the bark a bit more irregular and maybe looked over the light and shadow so it corresponded better to the original lighting on the tree trunk.
It all comes down to how finicky you want to be though! The recipients of your card won't be half as bothered with the realism as you probably are yourself, at least that's my experience.
To finish with: I know you didn't ask for this, but here's a tip to make the faces look less blurred after you've smudged them. Paste the original image in as a new layer and add a black layer mask to it. Then paint in white on the layer mask with a thin brush just on the spots where the smudging blurred a hairline or chin.