Hello Jim
I sent you letter with images.But I duplicate answer here.
I have no Adobe Photoshop Limited Edition 5.0, but I think it likes to Adobe Photoshop Element. Our plug-in (likes most of masking programs) requires addition image channel Ц alpha-channel (or transparency).а Image with such additional channel named УlayerФ usually.
Most of graphics format (JPG, GIF, BMP etc) do not support layers. PNG, TIFF, PSD formats support layer (PNG supports only transparency), but it no means that layer ALWAYS presents in these formats.
So, when you open an image (for example camera shot in JPG format), you have to create layer. When you may run the Background Remover plug-in.
I use Adobe Photoshop Elements 3.0 for demonstration.
1. Open an image (for example in JPG format)
2. Create layer using command УLayer->New->Layer from BackgroundФ

3. Show layer window (УWindow->LayersФ or F7)а to check layer creation
Before layer creation (you can see УBackgroundФ word)

After layer creation (you can see УLayer 0Ф word)

4. Run the Background Remover (УFileter->ImageSkill->Background Remover Demo)
5. Mark color inside and outside object and press Apply

6. Using defringe zone brush mark translucent areas and press Apply

7. Show selected object on colored mate.

8. If all right Ц press OK button.

9. Copy object to clipboard using commands (УSelect ->AllФ and then УEdit->CopyФ)
10. Open suitable background image
11. Paste object to background image (УEdit->PasteФ).
You have image with 1 background and 1 layer

12. Using УMove toolФ place object to desirable place.
13. Save collage in suitable format (NOTE: if you wish edit image later, save it in graphic format that supports layer properties (PSD, TIFF)
If you wish place image in WEB using JPG or Gif formats (Using Export commands for color optimization)
You mistake is :
When you create layer using command "Layer->New>Layer" you do not transfer any image data to new layer and you have only transparent area, use command "Layer->New>layer from Background" instead "Layer->New>Layer".
If you have any questions please donТt hesitate to ask me.
Best regards, Dmitry