1. In the Grant’s Tools folder that you downloaded and unzipped, open the folder called “actions pngs and xml files” and copy all of the files.
2. Now you need to paste these files into the PSE Photo Effects folder.
3. Next, you must rename an existing file, to point PSE in the right direction for Grant’s Tools. You must rename the file Mediadatabase.db3 to be MediadatabaseOLD.db3 (the same name with the word “OLD” added to the end in caps).
For Windows XP the path to locate this file is C:\Documents and Settings\All Users\Application Data\Adobe\Photoshop Elements\8.0\Locale\en-US
4. Now start PSE editor. It will take a long time for PSE to start up this first time after installing Grant’s Tools, but don’t be concerned. The software is “rebuilding” its database. It will start as normally after that initial time.
Clearer than mud I hope. Next look for a tutorial on how to use layer masks and the gradient tool to fad photos into backgrounds. That one will be much shorter and simpler, I promise.
Edited on 27 Sept '11 to add: I recently discovered another source for a layer mask action like Grant's Tools. It is at The CoffeeShop Blog. I haven't personally tried Rita's layer mask action, since I already have Grant's Tools installed, but I have quickly fallen in love with many of her other actions, such as the 2 Minute Miracle. Your photos may never be the same.
Edited on 1 July '13 to add: Photoshop Elements 11 includes layer masks, so no action or work around required. How to work with the masks is the same, however, so this tutorial still applies.