Refer the below link, go through the steps and make sure that you are selecting the correct application as mentioned in the article.
You will need to start the editor at least once each day during the trial, prior to attempting to use it with iphoto, in addition to what is described in the kbase article. In my experience when there is an alert window like the Continue Trial dialog box, the photo does not go, even if you have chosen the right file as the external editor. So start PSE once a day to get rid of the screen and then it should work fine.
Thank you for your response but the problem still persists. I have also tried uninstalling and reinstalling Elements all to no effect.