It's the C code that needs to go into the psgroove.c file in the main() function. I put mine right after the for(; instruction. That's an infinite loop.
The code basically sez if someone presses the button, put the board in DFU mode (programming mode). You have to modify the Makefile.psgroove file and change whatever MCU =, BOARD =, and F_CPU = are to appropriate values.
For my Atmel AT90USB162-16au board, the settings are:
MCU = at90usb162
BOARD = TEENSY
F_CPU = 16000000
Then you type make and hit enter. Granted, you need to have a proper environment setup. I use Linux. I had to make some small changes to the Makefile.payload (I believe). I removed the reference to the .exe and I pointed the makefile to the directory my PS3 compiler resides in (I wasn't using the cross compiler they speak of in the readme's. I was using another one.) Best of luck