It is considered "fair use" to substanitally modify an existing image in the creation of a new image for a noncomerical project such as a Poser render.

You might consider it fair use. A court may not.
Remember that Fair Use is a defense to be used in court. Not some kind of protective law.

I thought FaceShop "looked" at the photograph and "painted" what it "saw" onto a texture template.*

Every computer program that displays images does this.
When you view a gallery image here, your browser received the information from Renderosity and "paints" the image onto your screen.
When you open an image in Photoshop (or PSP or whatever) and copy the image into a new image, Photoshop "paints" what it "sees" into a new image.
Photocopiers also do this...
So do printers.
Hmm. So does your TV set.

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"you are terrifying
and strange and beautiful
something not everyone knows how to love." - Warsan Shire