Not always necessary -- but certainly recommended. If for no other reason than you'll get more predictable results.
It will also save you a lot of rendering, and the potential problems that can come of that.
I agree with Steve, however I always convert all non-standard footage to DV-AVI Type II files, and never have any issues, beyond the quality hit, that one takes with the first compresssion on sources like MPEG-2 in VOB's. No amount of conversion will regain that data, as it is lost, and gone forever.
I use an older shareware program, DigitalMedia Converter 2.7 from Deskshare. They have newer versions, but I have not tried those, as this version works fine for me, and I have a copy on all of my machines. As for freeware conversion ;programs, I have not used any in years. Back then, DMC did everything that I could ask for and at US$ 50 was just fine for me.
The simplest way for you to create those DV-AVIs is to use PRE itself. You've said that you already have VOBs on the timeline so set the WAB to cover the VOB then use the Share> Computer> DV-AVI to create a DV-AVI version (not having v4 it may be that you get at it from File> Export rather than Share). You can then be assured that you are not risking problems further down the line.
Insanity is hereditary, you get it from your children