My take

Knockout options let you specify which layers “punch through” to reveal content from other layers. For example, you can use a text layer to knock out a color adjustment layer and reveal a portion of the image using the original colors.

As you plan your knockout effect, you need to decide which layer will create the shape of the knockout, which layers will be punched through, and which layer will be revealed. If you want to reveal a layer other than the Background, you can place the layers you want to use in a group or clipping mask.
http://help.adobe.com/en_US/Photoshop/11.0/WSfd1234e1c4b69f3...

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Note added at 2 hrs (2012-05-08 14:04:25 GMT)
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http://www.youtube.com/watch?v=7y6jwEbkKnw

"Punching" text or a shape through to a lower layer in Photoshop is pretty simple. To visualize what exactly this is, think of two sheets of paper. A black one on the bottom and a white one on the top. Let's say you took a hole punch and put a hole in the white paper that is on top. Now you would see a white piece of paper with a black hole in it. We can create this same effect using the "knockout" feature in Photoshop.

The first thing you will want to decide is what image or graphic you want to see through your knockout. This needs to be the background. To change an existing layer to a background layer, first selct the layer and then choose Layer/New/Background from the menu bar. Whenever you open an image, it sould default as a background layer.
http://www.showandtell-graphics.com/layer-knockout.html

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Note added at 2 hrs (2012-05-08 14:05:32 GMT)
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I think 'masking' is terminology relating to film rather than Photoshop.