A layer set is simply a 'folder' where you can place your layers for more organization.  You can create a layer set from the menu by going to Layer: New: Layer Set or by clicking on the folder icon on the bottom of the layers palette.  By creating a layer set, you can keep similar layers together.

Isn't the hand so cute when it turns into a fist to drag layers?

You can create unlimited layer sets to organize your layers.  Photoshop CS now allows you to create layer sets within layer sets.  This is great for advanced designers who are working with dozens of layers.  When you reach a certain level in design you will definitely appreciate this feature.  As a designer you'll want to keep your palette's clean and uncluttered.  From my experience, it is very easy to create many layers very quickly (especially when you're creating adjustment layers). 

Try creating a layer set for a layer and its adjustment layer or preserved duplicate (original).  If you have two or more layers that obviously belong to each other, create a layer set and put them together.  If you're working on a design such as a movie poster, create a layer set for your "people" layers and a layer set for your typography.  You can rename layers sets by double clicking in the text area in the layers palette.

Layer sets have the feature of applying global effects to the layers contained within the layer set.  Layers within a layer set will act as "linked" layers and will move all at once when you are moving the layer set itself (when selected in the layers palette).  You can still work on individual layers when you double-click on the folder icon to open the layer set (and then select the specific layer itself).   Here is a transformation done on the entire layer set.

Make sure you don't place layers that shouldn't be linked in the same layer set.  You can easily move layers in and out of the layer set by dragging them from within the layers palette up or down to move them in or out of the set.  Simply close the layer set (click so the arrow points to the right) to reduce your clutter.  You can drag layers into a layer set when the set is closed.

Layer sets are a great organizational tool and become essential when creating complex designs as they provide you much less clutter.  You can break your layers palette down from 30 layers to, say, 6 different layer sets which you can open to work on individual layers.  Remember to move any single layer itself you can either right click when on the "V" move tool and get the layer, or open the layer set to get to the layer itself to work with it independently.

You can also color code your layers by right clicking and choosing layer properties.  I still haven't gotten into a habit of this yet so on my work to date you won't see it at all but I might start doing that because it looks perrrrty.  You can view a tutorial on layers @ BasicPhotoshop.com here.

- Orion Williams copyright 2004