Definately stick the frother into the milk. If you just want hot milk, leave it in the milk and just sort of move it around the bottom of the cup or container in which you are heating the milk. If you want froth (even a latte should have just a little) move the nozzle closer to the top of the milk so that air is infused into the milk. For lots of foam, heat the milk at the bottom first and then move the nozzle to just below the surface and then sort of bob the container up and down... just monitor the level of the foam.
Pour in the shot of espresso, then using a spoon to hold back the foam, pour the milk into the glass to the desired level/colour and then spoon in some foam or a lot of foam.
I used to own an espersso machine but I found it was a pain in the ass to clean and I don't have a lot of counter space. I now use a stove top espresso maker. I find it makes better espresso than the machine I used to have. Then, I just heat some milk in the microvave and pour in the shot. If I want a bit of foam, I use an aerolatte it works amazingly well.
