PHP is processed on the server, so of course you wouldn't see it in the source, you will only see the outcome.
In most shared environments, PHP will only work in files that have a .php extension. It will not work with files that have a .tpl extension.
No, he is saying he DOES see his php code in the source.
Since phpbb is handling tpl files a special way, the php code would not work in the template files even if they had .php extensions.
You cannot use php in template files without a special MOD for phpbb called Extreme Styles MOD