Once the file is unzipped, open the .png overlay in Photoshop or PSE by selecting File > Open, then browsing your computer for the file. Make sure you are selecting the .png file (not the preview.)
This brings the overlay into your editing window.
Open a new document or a piece of background paper the same way (Edit > Open.)
If you are using PSE6 or PSE7 you'll need to click on the overlay at this point to make it active (which makes it the large preview in the editing window.) Now click and drag the overlay onto the background paper in the photo bin (or onto your background layer if you are in Photoshop.) Be sure to drag from a solid (not transparent) part of the overlay. You can't drag from a transparent area, so zoom in to locate a solid area if necessary.
You can add photos over or under the overlay by opening, clicking and dragging them onto your background/overlay document. Simply drag the photos under the overlay layer in the layers palette to put them into position.
Note: Dragging an item UP from the Project Bin in PSE 6 or PSE7 converts it to a Smart Object, resizing it and causing it to lose transparency. In these versions, be sure to select the item and drag it DOWN onto your document in the Project Bin.