I am no expert on Photoshop Elements, hopefully Steve will be along later. You can not export from PSE5 to PE7. You will need to export from PSE5 in WMV format for example and edit this in PE7. In the new PSE7 you can export to PE7 as a slideshow file or WMV. If you export as slideshow file you can break it apart on the PE7 timeline and edit it.
That is my understanding, as well. The only linking between PE7 & PSE wlll be with PE7 & PSE7. Other versions will require that .WMV Export, that you mention. With Version 7 of each, then the linking can be done, and is the preferred way to do it.
Photoshop 5 slide show could not export Premiere elements 7.0. It supports PSE 7.0 to PRE 7.0. If you want import the PSE 5 slide show., Please export as wmv and import in PRE.