Everyone always seems mystified by Photoshop's layers features.
While layers are very complex, I believe that they are often viewed as being more complicated than they actually are.
A layer is simply a picture or transparent layer placed on top of another picture. Think of it as placing clear plastic wrap on top of a photo. By creating a layer, you prevent any damage or change to the base photo.
Here is a quick list of terms that will help you figure it all out:
Layer Pallette: You can see all of your stacked layers in the Layers Pallette.
Choose the layer that you want to work with by clicking on it.
You can delete a layer by clicking on it once then clicking on the little trash can icon.
Create a new layer by clicking on the little triangle at the top (it points to the right) and choose new layer. You often want to create a new layer when you want experiment without harming the photo.
You can also duplicate a layer, and group layers using the little triangle mentioned above.
Background: This is the base photo you are working with. You can't change your background layer unless you double-click on it and rename it.
Opacity: You can adjust the opacity (see-through-ness) of a photo by moving the opacity up and down in percentage. This will make the layer more transparent. 0 percent opacity is totally invisible.
Copy & Paste: There are several ways of creating a layer, but you will always create a new layer whenever you copy a photo, or selection of a photo, and paste it into another photo. You can also copy and paste layers in the same photo.
Text Layer: You can also create a new layer by using your text tool. Any time you use your text tool, it will create a new layer. This allows you to move the text around on the photo.
Styles and Effects: In Elements 1 & 2 you can double-click at the far right of any layer in the layer pallette. Elements 3 & 4 actually have a pallette dedicated to effects and styles. Effects and styles are used to add effects such as beveling and drop shadows to layers.
