This will show you how to create a pseudo Hi-Key effect, or a washed dreamy effect, or a bright colorful dreamy effect - this is a very versatile effect -

I'm going to use this excellent image of a pretty redhead girl (image courtesy of Ophelia, from StockXchange.com) for my example.

Since you can't do much editing on a background layer, make a fast copy of the layer by pressing + (remember that keyboard shortcut - it will come in handy a bit later!) - or you could just drag the layer into the New Layer icon at the bottom of the Layers palette, or you could click Layer>Duplicate Layer... and click OK in the ensuing dialog box....

...but keyboard shortcuts are just cooler! In less than a second, you've got a new, workable layer

Make the Background copy layer active by clicking it in the Layers palette.

Now, try out the secret keyboard shortcut: [Alt]+[Ctrl]+[~]

This makes a selection of the highlights of your image, which is the only part we're interested in selecting for this effect:

[PS Elements users: this shortcut doesn't work in Elements - but it DOES work as part of an action. It's available as part of the self-installing Handy Actions pack - your Swiss Army Knife for Photoshop Elements.]

With the selection still active, press [Ctrl]+[J] again to put the highlights on their own layer - if you looked at them by themselves, they'd look like this:

Add a Gaussian Blur to the Highlights layer (Filters>Blur>Gaussian Blur) and adjust the settings to blur the image but not really blow it away.

For this large-ish image, I used a setting of 9, but make adjustments according to the image you're working with.

Now change the blend mode of the Highlights layer to Screen.

You can already start to see the softness coming out in the image to the right - but wait! We're not through yet!

With the Highlights layer still selected, press [Ctrl]+[J] three or four or five more times to make several duplicates of that layer -

Make more than you think you'll need, because you can turn some on or off or reduce the opacity of some if the result is too strong:

Now go back to your Background copy layer and press [Ctrl]+[U] to open the Hue/Saturation dialog.

Drag the Saturation slider all the way to the left to remove the color from this layer for this resulting image.

It creates a darker, moodier dream look to the image -

For a brighter, cheerier dream effect, click on the topmost layer in your layer stack and create a Hue/Saturation adjustment layer above it.

This time, drag the Saturation slider to the right until you get the amount of color boost that you want - my example uses about a +51 setting on the Saturation slider.

You could also experiment with making adjustments to the Hue slider for more of a colorized effect. Experiment!