If at all possible, I'd suggest getting hold of the original camcorder files and transcoding them over again and creating avi files to work with for editing. Were they VHS or VHS-C tapes by any chance?
But, judging by the age of the dvd files it's more likely that the camcorder and the original tapes are long gone so that's probably out of the question.
So, the only files you'd be interested in are the vob files. The ifo and bup files are only instruction files for the dvd and you don't need them.
You can copy the vob files to your computer and just change the extension to mpg, since that's all they are. After that you can edit them any way you like. Personally, I think you'd be better off using a video editor rather than PSP/PSG. PSP/PSG is a good slide show creator but a somewhat mediocre video editing progam, in my opinion
Something to keep in mind, when those camcorder files were originally copied to disc, a certain amount of data was lost when they were transcoded to mpg files. If they have to be transcoded again, you will lose even more quality. You might not be thrilled with the end result so be prepared.
Joe