Step 1: Requirements
Hello Kitty McDonalds Watch (I used the square brown one because it best fits my tastes)
Triangular head screwdriver (you can make your own! thanks to adrianmonk) or a pair of pliers with a triangular end that will fit into the screw.
Printout of a picture you like (more later)
Keychain mechanism (doesn't matter what type you use, I used a d clip and a plastic clip from my work badge, you could easily recycle an old keychain instead)
Step 2: Remove the strap
Inside, you'll see the digital watch bit. It is very finnicky, so don't mess with it unless you have to.
Step 3: Add the keychain parts.
You could replace the strap with another watch strap. They're fairly cheap, and you can buy them at places like Shopko. Or, you could make your own strap out of duct tape, leather, or cloth!
Re-attach the back to the watch. Don't forget the screws.
Step 4: Remove the face.
Step 5: Get your image.
Trace around the cardboard image from the watch onto your image, including the area where the time shows through. AKA, make your image fit into the watch face. Cut out carefully with your craft knife.
Step 6: Put the face back on, and.... Done!
Congratulations, you are now a McDonalds toy hacker, and you have an awesome watch.