This is where you'd choose one of the system default templates or a custom template. For template to be available in this list they have to be uploaded via FTP or your control panel File Manager. You can also edit them via the area below this once they've been selected from the drop down list.
Customize your Template
This is the area where you can edit your template - you can either copy the source of your template and paste it in this window or choose one from the drop down list and click "Customize" - it will then be available for editing in this window.
1) This is a list of the site codes you can use in the template. They call in various things from your meta tags, view cart button, search box, catalog navigation to breadcrumbs and the email a friend link...they're all found in that link.
Paste in the window vs upload to the template directory
It's always best to up upload your template to the template directory, and name it something other then index.htm because any template from the drop down window becomes the new index.htm when you choose to customize/edit it in the above window. So if you or your designer upload your newly designed custom template with the name index.htm, then for some reason you decide you want to test out one of the pre-installed templates and click to customize it - you've just overwritten your custom template...it's gone unless you happen to have a copy of it on your hard drive or your designer kept a copy. :(
WARNING - DON'T NAME YOUR CUSTOM DESIGNED TEMPLATE "INDEX.HTM"