Step 3: Making the hole.
Dump out the original contents. You will notice what look like little glass beads in with the charcoal... I believe these are resin beads and are primarily used to remove heavy metals. Have your water tested to see if you have heavy metals that you would want removed. If so, you'll likely want to go with a filtration system that includes these beads.
As a side-note, some of the PuR filters (owned by Proctor & Gamble) now (as of March, 2008) come with a timed release version of sodium fluoride, which is toxic to mammals. You can read up on the fluoride controversy here ( http://www.fluoridation.com/ ), or you can Google the terms fluoride + poison. (2013 Update: PuR no longer sells their filters that "adds benificial flouride to your water")
Once you've got the hole roughed out, you can smooth it round with your knife, or you can use a 1/2" drill bit to ream out the hole. If you use the bit, set the drill on the higher gear range, as the faster bit speed will make a smoother, rounder hole. While you want a fast bit RPM, you want to insert the bit into your rough hole slowly so that you don't end up with tears in the plastic. You can actually use the fast moving bit to melt the hole, which will preserve the integrity of the plastic. Reversing the drill will provide friction/heat & help prevent tearing the plastic.
Finish up this step by trimming any excess plastic from around the hole and dry-fitting your plugs. Adjust the hole diameter with your knife as necessary... this isn't rocket science, the hole simple has to be tight enough to retain the plug so that the rim/shoulder of the plugs sits parallel with the surface, as shown in the photo.