I've had a look at CreateFont's source.
When you validate font creation, build() method is call.
Basically this method just call PFont save() method with the parameters provided by swing GUI elements.

So, looking at PFont save method should help.
You can use an hex editor to have a look at the vlw file bytes, that could help to understand how this works.
I'm sorry i don't have time to dig it further for now but that's an interesting topic.

Ok i found some time.

The vlw file starts with :

• The glyphCount (which is font number of character glyphs)
• A version number egal to 11 (which is i guess some kind of vlw file version).
• The font size (specified in the CreateFont GUI).
• The value 0 (was used for smth else before but not anymore).
• The font ascent (from the letter d).
  
• The font descent (from the letter p).
• Then it loops through all characters and write an header.
• Then it loops through all characters and write a bitmap.
• Then it writes the font name seen by Java when it's created
• Then it writes the postcript name of the font
• Then it writes a boolean to tell if smoothing is on or not.

I think what you are looking for are the writeHeader and writeBitmap methods of Glyph class.

So can this be edited with a photo editor in any way to perhaps improve the fonts or design your own?

No. I doubt any photo editor will understand this specific file format...
At best, you can reuse the original code to put your own images in place of letter images.