DVDs are encoded by iDVD into MPEG2, which iMovie cannot edit. So you need to convert the DVD into a codec that iMovie can edit. For highest quality, I recommend that you convert the DVD to Apple Intermediate Codec. There is a free tool called MPEG Streamclip that will do this. You will also need to install the Apple QuickTIme MPEG2 Playback Component.
Here are the details.
1) Download and install the Apple MPEG2 QuickTime Component ($20) - available online from Apple. http://www.apple.com/quicktime/mpeg2
2) Download and install MPEG Streamclip from Squared 5 (free).http://www.squared5.com
3) Start MPEG Streamclip
4) Insert your DVD into your Mac. If DVD Player or Front Row starts automatically, quit those.
5) Open a Finder window. Navigate to the Video_TS folder on your DVD.
6) Drag the Video_TS folder and drop into MPEG Streamclip.
7) If MPEG Streamclip offers to fix timecode breaks, say yes.
8) Use FILE/EXPORT USING QUICKTIME to convert the files to Apple Intermediate Codec (or h.264 if you prefer)
9) Optional steps.
9b) Optional: If you know the date and or time of the footage, name your file
(let mpeg streamclip provide the extension). This will provide metadata that iMovie will use to put the event in the right year and month.
9c) Optional: If you don't want to make one huge clip out of your DVD, you can make smaller clips by using MPEG Streamclip. Move the cursor to the "in" point of the clip, and press i. Move the cursor to the "Out" point of the clip, and press o. Then do steps 8 through 10 and repeat until you have done this for all clips you want.
10) Save the resulting file in a place where you can find it, like your Desktop.
11) Open iMovie.
12) In iMovie, choose FILE/IMPORT/Movies... and choose the file you saved in steps 8, 9, 10.
13) iMovie will generate thumbnails and you can edit.