Introduction

A new feature in Photoshop Elements 3 is the ability to add a frame to your pictures when you choose Picture Package or Labels in the Print dialog. You can use any transparent image as a frame and add it to the collection of frames Elements uses for this feature. First I will walk you through how to create a suitable frame, then I will lay out the steps fer getting Elements to use it.
If you already have a transparent PNG file, and you just need to know how to get it into the Picture Package menu, you can skip ahead to the last page.

Go to File > New > Blank File

New Document Settings

Choose the preset 800 x 600 and click OK.
Go to Edit > Fill Layer.

Pattern Fill

Under Contents, choose Use: Pattern and then pick a custom pattern that you like. The one I am using is from my free checks and plaids set.

Double click on the background in the layers palette, then click OK to the New Layer dialog. This converts the background into a layer that can have transparency.

Selecting the Cutout

Choose the Rectangle Marquee Tool and drag out a rectangular selection, leaving about a half inch of space around all sides of the document.

Knocking Out the Center

Press the delete button on the keyboard to knock out the rectangular selection.
Now we could just save the file right here, but I want to add some dimension to the frame.

Press Ctrl-D to deselect.

Inner Bevel

In the Styles and Effects palette, set the first menu to Layer Styles, and the second to Bevels.
Click on Simple Inner.

Change the second menu to Drop Shadows.
Click on Soft Edge.

Your image should looks similar to the one shown here.
Go to File > Save for Web

Set the Preset options to PNG-24 with the Transparency box checked.
Name your file with no spaces in the file name. Make a note of the file name (or copy it).

In your file explorer, go to the folder where Elemenets is installed (Usually C:\Program Files\Adobe\Photoshop Elements 3.0) and then click down to shared_assets\print_frames.

Right click on the file "frames.txt", go to properties and uncheck the "read-only" attribute.

Open the "frames.txt" file and add your new file name on a new line, followed by the equal sign, a space, and then the name you want to appear in the frames selection menu. (For example: plaid_pastel.png= Pastel Plaid)

Save the frames.txt file.

The new frame should now be listed in the frame menu when you go to print a picture package.