First, our cast of characters (okay, I swiped--no, borrowed!--that description from Betasseled's tassel tutorial, which you can find here: http://betasseled.blogspot.com/2008/08/tassel-tutorial.html It's really informative.)
Now, my cast of characters: We start with the candy cane, which we leave wrapped. Children like to eat 'em, with no respect for our creativity. Next comes a 1" pom pom and small craft eyes (both can be found at a craft store). Last up is a red pipe cleaner. For tools we'll use our trusty glue gun, tweezers, and a hair dryer (not shown).
First, bend the pipe cleaner onto the top of the candy cane so that each end is even. Add a dab of glue between the two pipe cleaner stems, and fold the pipe cleaner over, squishing the fold into the glue. (Don't worry about errant strands of hot glue. We'll use the blow dryer to clean those up when we're all done.)
Now bend the tips of the pipe cleaner up on each side, about an inch.
Next glue on the two eyes, just below the bend of the candy cane. (For this, I use tweezers, picking up the eyes in the direction I'll be afixing them, turning over to apply the glue, then fastening 'em on.)