Before you do anything, make sure you have backup copies of that template in case you goof up any of the editing.
If you've set up a Fully Hosted Domain, you'll see an example.com folder in your home directory when you FTP in. The contents of the html folder belong in there. Don't just drop the "html" folder in there, as that will mean your site is at example.com/html/. One of the files in there should be index.html.
The PSD folder are the graphics for your site in Photoshop format so you can edit text and such. That should stay on your home computer so you can edit those files.