I've wanted to do a tutorial on this for a while and since I gave myself the weekend off, I finally sat down and put one together. Screenshots galore -- and they're all on the large size, though I did compress them for loading size.
Instructions for PSPX, but they also translate into earlier versions of PSP. I'm not sure how they translate into PS, but probably not too well. Still, the general ideas are likely similar even if the technical stuff is different.
From
to
or 
Anyway, this will demonstrate how to go from "before" (top) to "after" (bottom) using just layers, gradients, and a few filters. I'd say the level of difficulty is moderate and you should be familiar with using layers and the airbrush and eraser tools.

(click to see larger image)

(click to see larger image)
01. First thing to do is work on the color and contrast. Duplicate the image as a new layer [ Screenshot ]
02. Set the new layer copy to blend mode Screen at 80% opacity [ Screenshot ]
03. Duplicate the layer again, then change the layer settings to blend mode Soft Light at 100% opacity [ Screenshot ]
04. Merge all layers (optional at this point) and then add a new raster layer [ Screenshot ]
05. Set the layer setting to blend mode normal at 100% opacity [ Screenshot ]
06. Choose a color or gradient for coloring the lips and cheeks. [ Screenshot ]
I used this gradient
from my Great-Great-Grandma's Dresses gradient set.
07. Select the Airbrush Tool [ Screenshot ]
08. Apply the color to the cheeks using the Airbrush Tool. The settings I used for this particular image -- and this will change depending on the size your image -- was the round tip at Size = 28, Hardness = 0, Opacity = 10. Apply the color to the cheeks until you're satisfied with the result. With the vintage tint look, it's okay if it looks kind of fake; the originals looked that way, too. [ Screenshot ]
09. Next color the lips, using the same settings except the brush size is much smaller, set to 4. You can paint rather than dab for these, and use the eraser tool to even out the lip edges as needed [ Screenshot ]
10. Add a new raster layer, blend mode normal at 100% opacity. Choose an eye color (I used blue for both) and then color in the eyes using the Airbrush Tool at the setting Size = 2, Hardness = 0, Opacity = 10. You may have to use the color black to darken the pupils again [ Screenshot ]
11. Duplicate the layer at blend mode Normal and 100% opacity, and then merge all layers [ Screenshot ]
12. Vintage photos often have a soft focus edge. To imitate this, click on the menu and select Adjust —» Add/Remove Noise —» Edge Preserving Smooth [ Screenshot ]
13. Change the setting to 2 (you can go higher or lower depending on the image) [ Screenshot ]
14. Duplicate the layer and set to blend mode Multiply at 80% [ Screenshot ]
15. Add a new raster layer, in preparation for coloring the image with a sepia tone gradient [ Screenshot ]
I used this gradient
from my Sepia Tones gradient set.
16. Change the layer properties to blend mode Color(Legacy) at 35% opacity [ Screenshot ]
NOTE: PSP 7 doesn't have Color(Legacy), only Color. It's okay to use that option; there's not that much difference between the two. Color is just a little lighter.
17. Merge all layers and save the image. You can also mess around with the saturation levels, which I did on the final image. Some people use curves, others manually adjust the hue/saturation levels, etc. Use whatever works best for you.
If you're really ambitious and have a lot of time to play, you can keep adding layers in the tinting stage and add color to skin and hair as well as clothing:
Edited to add a more colorized version, which used a layer for skin tone, another for clothing, another for lips and cheeks, another for hair, and another for eyes. After I merged all those layers, I duplicated the image layer, set it to screen at 80%, then duplicated it and set it at multiply 38%, duplicated it again at the same levels, then duplicated it again with multiply 25%):

Hope all that makes sense.
The original image is from this site.
Instructions for PSPX, but they also translate into earlier versions of PSP. I'm not sure how they translate into PS, but probably not too well. Still, the general ideas are likely similar even if the technical stuff is different.
From
to
or 
Anyway, this will demonstrate how to go from "before" (top) to "after" (bottom) using just layers, gradients, and a few filters. I'd say the level of difficulty is moderate and you should be familiar with using layers and the airbrush and eraser tools.

(click to see larger image)

(click to see larger image)
01. First thing to do is work on the color and contrast. Duplicate the image as a new layer [ Screenshot ]
02. Set the new layer copy to blend mode Screen at 80% opacity [ Screenshot ]
03. Duplicate the layer again, then change the layer settings to blend mode Soft Light at 100% opacity [ Screenshot ]
04. Merge all layers (optional at this point) and then add a new raster layer [ Screenshot ]
05. Set the layer setting to blend mode normal at 100% opacity [ Screenshot ]
06. Choose a color or gradient for coloring the lips and cheeks. [ Screenshot ]
I used this gradient
from my Great-Great-Grandma's Dresses gradient set.07. Select the Airbrush Tool [ Screenshot ]
08. Apply the color to the cheeks using the Airbrush Tool. The settings I used for this particular image -- and this will change depending on the size your image -- was the round tip at Size = 28, Hardness = 0, Opacity = 10. Apply the color to the cheeks until you're satisfied with the result. With the vintage tint look, it's okay if it looks kind of fake; the originals looked that way, too. [ Screenshot ]
09. Next color the lips, using the same settings except the brush size is much smaller, set to 4. You can paint rather than dab for these, and use the eraser tool to even out the lip edges as needed [ Screenshot ]
10. Add a new raster layer, blend mode normal at 100% opacity. Choose an eye color (I used blue for both) and then color in the eyes using the Airbrush Tool at the setting Size = 2, Hardness = 0, Opacity = 10. You may have to use the color black to darken the pupils again [ Screenshot ]
11. Duplicate the layer at blend mode Normal and 100% opacity, and then merge all layers [ Screenshot ]
12. Vintage photos often have a soft focus edge. To imitate this, click on the menu and select Adjust —» Add/Remove Noise —» Edge Preserving Smooth [ Screenshot ]
13. Change the setting to 2 (you can go higher or lower depending on the image) [ Screenshot ]
14. Duplicate the layer and set to blend mode Multiply at 80% [ Screenshot ]
15. Add a new raster layer, in preparation for coloring the image with a sepia tone gradient [ Screenshot ]
I used this gradient
from my Sepia Tones gradient set.16. Change the layer properties to blend mode Color(Legacy) at 35% opacity [ Screenshot ]
NOTE: PSP 7 doesn't have Color(Legacy), only Color. It's okay to use that option; there's not that much difference between the two. Color is just a little lighter.
17. Merge all layers and save the image. You can also mess around with the saturation levels, which I did on the final image. Some people use curves, others manually adjust the hue/saturation levels, etc. Use whatever works best for you.
If you're really ambitious and have a lot of time to play, you can keep adding layers in the tinting stage and add color to skin and hair as well as clothing:
Edited to add a more colorized version, which used a layer for skin tone, another for clothing, another for lips and cheeks, another for hair, and another for eyes. After I merged all those layers, I duplicated the image layer, set it to screen at 80%, then duplicated it and set it at multiply 38%, duplicated it again at the same levels, then duplicated it again with multiply 25%):

Hope all that makes sense.
The original image is from this site.

Comments
Fab resources and fab tuts, you really are a clever clogs :-)
The full coloring one took some 40 minutes to do. It's not something I'd want to attempt with any frequency, but if I ever need to tint any scans I make of old family photos, now I know I can do it.
Heard of clever old stick? Means the same, 'well aren;t you talented' sort of thing :-)
Clever old stick is an idiom I have heard, but clever clogs was a new one. And kinda funny since I think of clogs as chunks of wood crudely carved into a shoe shape. My family immigrated to the US from Belgium in the 1850s and we have a pair of great-great-etc grandpa's wooden clogs. They look practical for farm work, but not terribly clever. ;)
LOL - unless they are magic clogs ;-)
It's a great tutorial. I was trying to learn by mimicking your steps, and I thought I was doing good.. until I tried without following you to the T. Let's just say I was like a child coming off training wheels for the first time. My confidence was up for half a second before it followed as I crashed to the ground. My knees skinned, I'd much rather keep the training wheels on!
All that to say
PLEASE continue with this tutorial! I want to see exactly how you colored the skin and clothes, etc!
please? *begs*
If you're new to image manipulation, I just can't stress enough that layers are your best friend. Until you get a little more experienced, create a new raster layer for each manipulation you'll be doing, whether that's color with the airbrush, adding brushes or text, or blending new images. It might help to play around with small images first until you get the hang of things; this isn't an easy tutorial for PSP beginners, I don't think (FWIW, I've been using for PSP for 6 or 7 years.)
I have a general resource for skin colors that I know I used for their skins. You can find the swatch colors here.