Free transform question?

[sgogula]

I am following this tutorial (http://www.youtube.com/watch?v=3gySpAuuDM4&eurl=http://video.google.com/videosearch?q=change+background&sitesearch=)to change the background of an image. Here is the steps i followed:
1) Layer Image 1(Original Image) (Layer 0)
2) Create new layer (Layer 1)
3) Select the background using lasso tool and delete it
4) Copy Image 2 (Background Image)
5) Paste it on Layer 1(new layer)
6) Select Image--> Transform--> Free Transform.

The problem here is when I select free transform and drag it on Layer 1, Image 2 should display as a background as shown in the tutorial. But in my case, I see it as a foreground.
I mean when I drag it on Layer 1, I do not see the original image at all.

How do I make the background image transparent so that it would sit nicely behind the subject?

Please let me know if i am not clear with my question.

Thanks

[frank abramonte]

Make sure that the space for the new background is still selected when you paste in the new background. You may have unselected it or clicked on the wrong layer. Make sure your on the correct layer.

[sgogula]

Thanks Frank for your quick response. Yes, you are correct, I was doing just paste instead of paste selection. Thanks for your help.

I have one more question. how to smoothen the edges of copied image, especially at hair. Can I add glow at the edges of the copied image so that it looks natural.