Most likely that footage will not work well or look good in Premiere Elements. The capture device you're using is a low-end digitizer and likely came with some software for editing (ArcSoft Shopbiz). It's designed to work pretty exclusively with that software.
MPEG1 is a very low quality format.
You can try using the project settings for Hard Disk Camcorder/Standard Defintion for that footage -- but I make no guarantees about the quality.
The best device for capturing analog video is a DV bridge, like the Canopus AVDC, as we discuss in this FAQ.
I think you could try MPEG2 format for your capture, you could have a better quality for the clips
and editing in PREL is possible.
I copied my set of old VHS tapes to DVD using a VCR/DVD recorder, to have numeric copies.
Then I used some clips from the DVD, recorded in MPEG2 format, for editing. Of course, if the
original tape has some images or colours not perfect, due to the time, the copy has these defects.
But most of the time, what is recorded on DVDs has good quality.