Bear in mind I have only been using the program a few weeks myself, but I can take you step by step and hope that anyone who spots any glaringly obvious errors will yell at me

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Open up PSP, then open the template (assuming you have already unzipped it).
You need to make a new layer, to put your shirt into. So although there are already a few layers in the template, you need to click the new raster layer heading that appears above the list of layers on the right of the working area. (If you mouse over heading you will see what they say...alternatively use the "new raster layer" heading in the layer menu.)
This new layer is where you put the images or drawing that will be your shirt. You can open up pictures and cut and paste or copy and paste into this working layer, or you can draw directly onto it. Notice that some operations like deform will create a new layer, or promote a selection to a new layer as you are working.
(If you want to have some layers with different degrees of transparency, it if a good idea to have each of these on a different layer as you work. To set the transparency for a layer, click layers-properties, and then you can set and lock the transparency for that layer...but this isn't necessary for clothing where it is all at the same level of opacity/transparency.)
Do everything you need to do to your shirt.
What I do next, is to switch off all the layers of the template. If you click on the eyes which are the visibility toggles for each layer, this will switch off that layer. At this point, if I have more than one layer with images on them, I merge them, but I don't think that is absolutely necessary. You could delete the layers which are part of the template instead of switching them off, by right clicking the layer and choosing delete.
You will probably need to make a mask to ensure that the areas without an image become transparent. Click on layers-new mask layer-from image and check source opacity, then OK, making sure that invert mask data is NOT checked.
Then click on layers-load/save mask-save mask to alpha channel-save.
Then you need to save the texture as a tga, by clicking on file-save as-rename the file with your title, choose truevision targa from the drop down list for "save as type".
To upload it, when in game, click on file-upload new file-browse your files to choose the garment you saved, select it, and then preview. You can move the previewed garment around to check seams etc, and then choose to upload if you approve what you see. It will cost $10 linden to upload the texture, which will then appear in your texture list.
If after saving your shirt, you have to go back to it and work on it again, you will need to open it up and then load the alpha channel by clicking on layers-load/save mask-load mask from alpha channel. I usually merge the mask and working layer at this point, and then delete the alpha channel for the shirt. Then when I have made my changes, I go through the same routine to make a new alpha channel and save the shirt.
Hope this helps and illuminates whichever missing stage you have missed out

. If you need more help, please feel free to IM me if you see me in game.
Cali