Were the photos on a disk that was attached to your computer at the time you tried the upgrade? Or were they on a disk that was not connected?
Are the photos in the location that PSE expects them to be in (in other words, is there a question mark on the photos in the PSE Organizer)?
I'm amazed at the idea that this Adobe product would not support .psd files
Lightroom does support .psd files, as the earlier message said