Sounds like you are really confused. This is really easy to do with Lion.
Move the Express to the same general area as the Time Capsule for the following operations:
Power up the Express and let it run for a minute
Hold in the reset button on the Express for 9-10 seconds and release
Allow a full minute for the Express to display a slow, blinking amber light
On your Mac running Lion....click the fan shaped AirPort icon at the top of the screen and wait 5-10 seconds for the heading that reads New AirPort Base Station to appear
Click on the AirPort Express listing just below that and AirPort Utility will open automatically

Allow a minute for AirPort Utility to analyze your network and then announce that the Express will be configured to "Extend" your wireless network
Enter a Base Station name for the AirPort Express that you want to use....example AirPort Express......and then click Next
Wait another minute or two for AirPort Utility to automatically configure the AirPort Express.
When you see Setup Complete, click Done.
Move the AirPort Express approximately half the distance from the Time Capsule to the general area that needs more wireless coverage and power it up.
You are all set.