How to blend one image into another
The layer mask my friend. Click here for the article on layer masking. Often throughout many great designs you will see perfect fades where an image (layer) fades into the color or rest of the background. How can you create the universally used effect? With my secret weapon; the gradient layer mask.
You simply use the gradient tool on a layer mask to 'swipe' in and hide pixels. The gradient is the smoothest way to hide pixels with the layer mask (you can also use the brush, paint bucket, fills, etc.). Remember to use black as your foreground color and foreground to transparent as your settings. Using foreground to transparent will allow the black (hide pixels) to fade into invisible-ness so you can see the layers beneath it.
So to blend one image into another, have your two layers on one document and simply click on the layer mask icon to add a layer mask. Now grab your gradient tool on the right settings and swipe across one of the layers (make sure the layer mask icon is selected in the palette). The shorter your swipe, the tighter the fade will be and the longer your stroke, the smoother a transition of the blend you will have.
You can view the rubylith (which shows you what you are doing) by toggling the "|" key on the keyboard or going on the channels palette onto the layer mask channel (yes it's own channel is created) and clicking the eye on and off. You can mask without the rubylith but I recommend using is so you can see what you are doing if you are a beginner. Remember to choose white to bring back your original pixels on the layer mask and you can use any level of grey in between.
Try taking a photo of yourself (a close up) and dragging it onto an image of a sunset, do a good layer mask to cover the rough edges and put the blending mode on screen, lighten or overlay. You will often have to use layer masking (better than "erasing") if you don't make selections before you drag new layers in because they will have the rectangular shape around them. I will usually just layer mask it if I don't need to get a selection (ie. landscapes).
Oftentimes I'll use the star gradient tool with the rubylith on and switch to the smudge tool on a brush of say, 8 pixels and 90% strength and drag one of the lines out to create a starburst effect.
Learn how to blend with the layer mask and using the gradient tool. It's my single favorite and most used feature in Photoshop for graphic design. Here's a perfect basic example of a "blend" using the gradient tool on a layer mask (you only need to choose one layer to mask).