Convert VOB files to MPEG or Quick time

MPEG Streamclip from Squared 5 will handle this if you have the $20 QT MPEG-2 Playback component installed. Simply open or drop one or more VOB files to the work area, application should the scan for possible time code breaks (you can press Command-F to run the "fix timecode breaks" routine id you don't trust the automatic scan), and select the compression format to which you wish to convert and edit in iMovie '08. DV, AIC, M-JPEG, Photo-JPEG, MPEG-4, or H.264 are all edit compatible with iMovie '08. Here is a quickie tutorial demonstrating how to convert a "muxed" MPEG-1 file to AIC/Big Endian (MPEG-2 conversions work the same way):
TUTORIAL 20: MPEG STREAMCLIP CONVERSION

If by "qick time update" you mean you have the QT MPEG-2 Playback component installed, then you can export to whichever compression is "best" to your point of view. DV, AIC, and H.264 (with unlimited video data rate) produce large files which generally produce the best quality (or at least have the least loss in quality). M-JPEG and Photo-JPEG files produce intermediate sized file which generally produce intermediate quality and tend to thumbnail more quickly. MPEG-4 and H.264 with limited data rates produced the smallest files but with generally less quality. MPEG-4 is about 2.5 times less efficient than H.264 but generally encodes much faster where conversion time is important. Other than that I have no idea what is "best" for you.

conversion back to dvd via i-dvd

If you use one of the pre-set options for exporting your edited project it will be H.264/AAC by default. If you use the "Export using QuickTime" option, then you can use whatever compression format and settings you wish. As long as the format is QT "conversion" compatible, iDVD will be able to convert it to MPEG-2 and multiplex it with PCM converted audio.

Basically they are breaks in the continuity of the multiplexed MPEG data stream sequence -- e.g., dropped/lost frames, breaks between VOB files, breaks between DVD layers. While most other PC players disregard these lapses, QT is a temporal (time reference sync) media player and is very sensitive to these breaks and may skip segments, crash, or fail to recognize such as being valid movie files.