How does the layer mask work?
To create a layer mask, select the layer you wish to add it to, then click the layer mask icon (rectangle with circle) at the bottom of the layer pallet.
The little image next to each layer isn't just for fancy decoration. It shows what channel of the layer is selected (sort of). When you add a layer mask you get another image. Now the two (the layer and the mask) are like a switch. If you look closely the one that's selected has a border around it.
The layer mask itself is not black & white, it's grayscape. Each pixels visibility (transparency) on the image on the layer (you added the mask to) is determined by the shade of gray the pixel in the layer maks has. Of course you have the absolutes black (0% opacity) and white (completly visible) but they are still gray in a way.
The mask layer is usually hiden just because it's easier to do stuff in a what you see is what you get kind of way, but it's there. You can think of the little images in the layer as sub layers. If you really want to change the main view to the mask just alt click it's picture in the layer (alt click again to switch back).
To get partial transparency, select the layer mask and brush with black/white with transparency set on the brush.
Directed @ whiter (pm conversation)