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This is a layers presentation that I created in 2012 but the concepts remain relevant, at least through Creo 3. How layers work comes up often, and this has helped several people, so I thought I'd put it in it's own document.
My original blog post on it is here:
http://www.design-central.com/index.cfm/news/news-entries/understanding-layers-in-pro-engineer/
Inspired by the 2007 layers presentation by Glenn Beer and subsequent discussion at MCAD Central here: