I'll use a Fire materia for the following example.
When equipped on armor, it has the following effects:
1st level - cut fire damage by 1/2
2nd level - no damage from fire
3rd level - heal half damage from fire
4th level - heal all damage from fire
5th level - heal all damage from fire (it just produces a new Elemental materia)

I might have my numbers a tad off but you get the idea of what it does.