Basics (Part 1, Continued)
Options C & D: Using Magic Wand & Pen Tools for Isolation
The "magic wand" and the "pen" tool can both be used to select the background you want to get rid of. As experienced designers & PS users know, the pen tool is much more sophisticated than the magic tool. Isolation-wise, both could be used effectively. A weakness of the "magic wand" tool is that it is quite cumbersome when used to select complex backgrounds (foliage, forest, any other kind of "busy" background where there are many color transitions). When it comes to monotone backgrounds, the wand tool offers a somewhat faster solution, if used wisely. I will use this "kiss" image to illustrate the use of the magic wand and the pen tool for isolations. Let's start with the "magic" tool walk through. 
As in the first example (the "eraser" strategy), we need to create a copy of the original level by either pressing Cntrl+J or by going to layers -> duplicate layer. Next, select the "magic wand" tool and click anywhere on the background. Depending on the "tolerance" of your magic wand (usually, tolerance window is in the upper left corner of your photoshop window), you will either need to add a lot more background to your first selection or nothing to close to nothing. In this case, I set tolerance to 33, which allowed me to select all of the gray background in one click. If your "tolerance" is too low and your "magic wand" does not select all of the background, or if you need to add additional areas to the selection (in our case, the letter "i" has a little flower-shaped hole in it which was not selected), you can add to the selection by holding the SHIFT key down (to subtract from the selection, hold the ALT key down).
After you've made your selection with the wand tool, there is a must step to avoid ugly, rough edges that are common to all the selections made with the wand tool. Right click your mouse, scroll down the list of options to select "feather", and select the appropriate level of feathering (would probably vary from 0.5/1 pixel to around 3-4 pixels depending on the size of your image). NOW that you have feathered your selection you can safely delete it. Let's make the original layer invisible and see what we've got after this "magic wand' manipulation (see image on the left). Pretty neat, huh?
Now, the next step is to create a new layer filled with white under this level, so that white shows through under the letters and the heart. It offers a good test of the quality of your selection and a good way to see what kind of touch ups you need to do for a perfect isolation. Go to layer-> new fill layer -> solid color, and select pure white. This new level will be created over the original level and the level where we removed background with the wand. What you need to do is go to (or open) the layers window (window -> layers) and drag this new layer down,uner the manipulated layer. Now you can delete the original background level (it's up to you to keep it as long as you want to or to delete it right away, usually I like to keep it around by making it invisible just in case I go wrong and I need to start from scratch or in case I need to "reveal" parts of the original background by "erasing" the manipulated layer. All right, what does our "collor filled" layer test tell us?
In general, we did a pretty good job with the magic wand background removal. Transitions between the erased and the non-erased areas are smooth and soft, save for a couple of stray areas. You have to zoom your image at least to 100% to see all the trouble spots. To rectify the situation all you have to do is select a relatively small, soft eraser and erase these rough edges.
Flatten the image, and you are done!
From this: to this :
Now, a few words about the pen tool. It is one of the more versatile and sophisticated selection tools in photoshop. Basically, what you do is use the pen tool to trace around the contours of the object you want to isolate point-by-point. It is much more sophisticated than the polygonal lasso tool (which I myself used ot use for isolation in my early days of photoshop) in several ways: it allows you to leave your selection/save it, do something else, and then go back to your project; it allows you to adjust the steps you make and the strokes you create, it is much more versatile when it comes to tracing around anything non-linear. For beginners, the pen tool may seem a little bit overwhelming and complicated. But once you've isolated a couple of simple objects with it, you will see that it's quite intuititive. With the pen tool, we are aiming to create the same kind of selection around our main object as we created using the "wand tool". Once we have this "selection", the rest of the process is the same (select feathering; remove background, create a new fill layer, touch up, you are done!). Now, how do we get there?
The image below serves as a map to some of the pointers regarding the use of the pen tool. Using pen tool for isolating this particular image is probably not the best choice as we are dealing with a light monotone background that can be easily selected by a wand tool or knocked out by CTRL+L (levels). However, imagine what if instead of gray you had a grassy background? Then, the pen tool would be indispensable. Of course, pen tool is more time consuming than any of the previous "one shot" selection strategies. Here, you will have to trace contours of all the components of your image with the pen tool. But the end result is worth it. Okie dokie, let's get started. By know you should know the drill: create a copy of the original layer (Ctrl+J). If you don't, isolation won't work as you won't be able to knock out the existing background and slide a new color filled layer under your main layer so that the white of the new background could show through.
1. Select pen tool :) Now that's simple enough, righ?
2. When you start using the pen tool, photoshop automatically creates a new layer in the layers pallete. In a way, pen tool masks away the objects you trace. The shape of your trace is seen in 
this layer. Don't try to use eraser or brush tools to work on this layer. It won't work.
3. Usually, the mask created by the pen tool is filled with whatever color you have set as your foreground color. In our case, it's bright blue. As you can see, I started tracing letter S with the pen tool, and traced about a third of it. The trickiest part of this whole enterprise is actually learning how to control the pen tool. There are plenty of tutorials and books on this, but basically what you do is create the first, starting point by clicking with your mouse pointer. After that, the logic is sort of like in "connect the dots". As your next step you select your next "point" that you will connect to the starting point. Now, here's where it gets tricky: if you were to use the polygonal lasso tool, the "connect the dots" logic would work very simply: photoshop will connect the two points by a straight line. The pen tool allows you to connect your dots by curves (which is what's so cool about it! but it's also paintful to learn how to control the pen tool to make it do curves).
When you select your next point, what you have to do is select it with a mouse click but before you click on your next "connection point", you have to press and hold the left mouse button down. Click on your next "point" then keep holding the left mouse button down while dragging in in the direction of your trace. You will see the "connecting" line curve. Keep dragging and experimenting until you are satisfied with the shape. Then on to the next "dot". And this is how, step by step, dot by dot, curve by curve, you isolate objects using the pen tool (isn't this the shortest pen tool explanation ever?)...
4. To get rid of the blue fill, you can lower opacity of the mask to zero, then you'll be able to see through what you are masking (see #4 on the image above for locating the opacity window)
In the end, hopefully, you've suffered through the "connect the dots" exercise and are nearing a full circle (full trace). For the purpose of this tutorial I have only traced one letter "S", but hopefully it will be enough to illustrate what I want to say: before you can proceed with your isolation you have to "close the path" of your trace. When you are close to coming a full circle with your trace, you have to click on your very first, starting point to close the path. You will know that you are doing the right thing and clicking in the right place when you see a tiny circle appearing right next to your mouse pointer. THEN, click. Now, your path is closed, and you can convert it to a selection. 
Specifically, after you've closed your path you won't see any of the connection points you've traced any more. Your path will be closed. Now, before you proceed you have to convert your path to a selection. Right click your mouse and select the "make selection" option. This will pop open a window that will allow you to select "feathering" for your selection. I am going to select 0.6 for this one (the size of feathering depends on the size of the object you are isolating: the bigger the object, the greater the feathering, otherwise your selection may still appear as having rough, zig-zaggy edges; also make sure you have the "anti-aliased" option 
checked - it will also help avoid zig-zaggy edges).Click "okay", and you will see "marching ants" of a selected area.
Remember, the selected area lies within the trace we've just made. What we need is select the outlying area - the background. To do this you have to switch from the pen tool to any of the marquee tools, then right click your mouse, and choose the 
"select inverse" option. This should select everything else but the letter "S" we've just traced. Click delete.
And, you are done using the pen tool! Of course, you should have isolated all the letters, inside and out). But, hopefully, you get the idea. Now, proceed with the same steps as in the exercise using the wand tool above: create a new fill layer with white, move it to under the layer with the deleted background, zoom to 100% or higher to check for any rough edges, erase any rough edges (make sure to have your top-most layer selected when you are doing this), flatten. Now, that's it!
Afterword: skill comes with practice. Start isolating simple objects, which will help you understand the logic of feathering & layers. Then, move on to more complex objects - animals, bikes, complex architecture. These will develop your understanding of how to "treat" smaller details of your isolations. Usually, when I "isolate" from gray or light color backgrounds, I usually "burnout" the background with "levels" on a new layer, then erase most of the foreground with the eraser in a few quick strokes, and then use a combination of eraser and painting with white to perfect my isolation. Usually, converstion from gray to white takes 2-5 minutes. When I isolate complex objects on a non-monotone background, I use the pen tool. Good luck! Don't forget to read my "advanced isolation" tutorial.