Hiya kush! I use PSP 5 (Free on a magazine, yay!)... I'm sure there are people who're much better at making clothes than I am using PSP too, but I think I have the basics down so I might be able to help you with some stuff ^_^
I guess I can write out a quick tutorial, though I'll probably miss some stuff - This is just how I do it, and I'm by no means an expert, but hopefully it'll help you get the basics. (Hope it's not TOO detailed, you did say step by step!)
Cerulia's Paint Shop Pro 5 Clothes Tutorial!
1) Decide what you're going to make, and find some source pictures, the more the better!
2) First you'll need a template - I use Chip Midnight's excellent ones, available
here (And thank you Chip!). The PSD files won't work in PSP, so just save the JPG ones
3) Decide which template you'll need, open it up and save it as a PSP file. I do this first of all because otherwise I'll forget and save over the templates ^_~
4) A lot of people will work in the high resolution, then resize it down when they're done. This let's you have more fine detail, makes it easier to work and hides small flaws when you shrink it. Personally, I resize it *first*, in this step, and then work at the smaller size - I prefer to have the image look how it will when it's done, and find that shrinking it can lose detail or mess things up. This is just up to personal preference really.
5) The template should be your background... in the layer editor, right click its layer and say 'Duplicate', then set the transparency to 0 with the slider. This second layer will go above all your other layers, so that by sliding up the transparency you can check your clothes against the template easily.
http://img153.imageshack.us/img153/1217/image16vu.jpghttp://img133.imageshack.us/img133/4323/image25dw.jpg6) Make your clothes! Can't help you much with this step, just do your thing
6.1) The only thing to keep in mind when making your clothes is the seams... Seams are probably the single hardest part of making clothing. Chip's template has coloured bands all around the edges - Those bands match up to each other across the seams, so try to make your clothes match up too. This can be a real nightmare, but as far as I know there's no way to make it easier, just trial and error tweak it till they're right!
7) Ok, you have your clothes done and they are looking fantastic! At this point you might be done, but I'm going to assume you have some transparencies you want to add. Save a copy with all the layers intact! This is very important in case you want to go back and change some things! If you haven't got any transparent parts, just save it as a TGA at this point and upload!
Finishing up, making an Alpha:

First, delete the copy of the template over all your layers - You won't need it anymore. Then, click the layer visibility toggle beside the background so it's not visible, and then right click any of the other layers and say 'Merge Visible'. This'll leave you with a single layer over the template.
http://img474.imageshack.us/img474/8996/image35mh.jpg9) Go ahead and clear the template, it'll just distract you now (Edit>Clear while the background's selected).
10) With the clothes layer selected, use the magic wand tool to click anywhere, with 'Sample Merged' unticked in its options. This should select everywhere you've not drawn clothing.
11) In the 'Selections' menu at the top... Selections > Modify > Expand, set it to one pixel and say ok, then Selections > Modify > Feather, also one pixel. You might need to adjust the pixel values a bit for different sizes, but that's what I generally start with. This'll give you a nice, tight selection round your clothes.
http://img474.imageshack.us/img474/6089/image40em.jpg12) With it still selected, go to the 'Masks' menu at the top, and say Masks > New > Hide Selection. Your image probably won't look any different, but if you say Masks > View Mask you'll see a faint red highlight across your image - That highlighted area will be invisible.
http://img154.imageshack.us/img154/3693/image54kk.jpgAs you can see in this example, depending on how fuzzy your edges are you'll be left with some white - Note that the white up the top right edge doesn't matter, as it's outside the template. Only the bottom edge will be visible on the clothes, so we need to tidy that up!
13) Go to Masks > Edit, then select black... make sure it IS black! It has to be 0,0,0, so click the colour and select it from the top left of the colour picker. Alpha, and masks, work like this: Black is invisible, white is totally visible, and all the shades in between are semitransparent. If you use a colour like 17,17,17 which LOOKS black to the human eye, it'll leave a faint white outline around your clothes and they won't look good.
With your black and a paintbrush, just fill in those white edges, you'll see them disappear - Don't worry too much about getting it pixel perfect, we'll fix that soon.
http://img136.imageshack.us/img136/9752/image67yc.jpg14) When you're finished with your mask, go to Masks > Edit and deselect the editting checkmark. Then Masks > Save to Alpha Channel and click ok. Now Masks > Delete (Say no to merging it). Deleting the mask is important because if you leave it in then when it's saved as a TGA everything masked becomes white, and the mask itself makes a white outline round your clothes. Don't worry, all the mask data is saved in the alpha channel! If you want to change the alpha later just say Masks > Load from Alpha Channel and go back to step 13.
15) Make the background the active layer, and then find a fairly dark colour on your outfit and use Fill (With Sample Merged unchecked in the options). Now, go along the edges and select the rough colour of them, and splodge it up on the background. Don't worry about being too precise, you could even skip it if you want, this won't be that noticable, but it helps hide the outlines on the clothes.
http://img492.imageshack.us/img492/5416/image75xz.jpg16) That's you pretty much done! If you've been working at a higher resolution, shrink it down to your final size now, then save it as a TGA (The options I use are 24 bit uncompressed - Apparently TGAs with alpha layers are 32 bit but PSP seems to add that automatically, 24 is the highest you can select), go into SL, upload it, then select it as the clothes texture and be the envy of all your friends!
Phew, much longer than I was expecting, but I hope it helps you! I'm sure there are better ways of doing things, this is just how I do it ^_^