When you are using Overlay Images on your templates, ProSelect gets these image files from the Template Overlays folder inside your ProSelect Resources folder.  These overlay images must be .png format files for ProSelect to be able to use and display them.

You can also have .psd format files with the same name in the same folder, however, these are only used by Photoshop during Hi-res Production provided that you have Use PSD file for Overlay Images checked in the Preferences -> Hi-Res production -> Output Settings -> Output File.

You can add your .png and .psd files directly into the Template Overlays folder yourself.

Otherwise, you can use the Import using Photoshop button in the Resource Select dialog window within ProSelect. In this case, when you select a file to import, ProSelect gets Photoshop to convert it into a .png file for you and saves it into the Template Overlays folder.  If you also have the Copy .psd file to Resources box checked and you are selecting a .psd file, then a copy of the .psd file will also be added to the Template Overlays folder.