The inside of the hair is the cortex. The cortex is filled with strands of keratin protein. The proteins form long stretchy rubber band like strands. These strands give hair it's strength and help support waves and curls. Fine hair (small diameter of a single hair) is always lacking in protein because the cortex is smaller and can't hold the proper amount of protein easily. Coarse hair (large diameter of a single hair) has enough protein and and adding more protein (in hair products) can be too much protein. I talk about this in some of my other posts.
The outer layer of hair is the cuticle. The cuticle is like scales on fish or shingles on a roof. It is actually 4-12 layers of fish scales or shingles on a roof (estimates vary and it varies by ethnicity). The closed cuticle keeps the proper balance of moisture and protein inside the cortex. The "shingles" laying flat (closed) also reflects light and make hair shiny. When the cuticle becomes damaged from heat, sun, wind, brushing, dyeing, straightening, perming, etc., you may lose a layer or more of "shingles", the "scales" will open up, or it may loose some individual "shingles". You may even get a hole in you cuticle. Through these openings, moisture and maybe some protein will escape. When this happens, you hair is not as healthy. Again, more on this later. The picture (above left) is of damaged hair under a microscope.
For further reading on hair structure see these random links I have bookmarked:
Exploratorium Magazine, Better Hair Through Chemestry
Black Girl Long Hair- Sturcture of Hair Close Up