Editing and opening .mpeg files in IMovie?

iMovie can't edit mpeg files directly - you must convert it to DV (in process losing quality) and then compress it again to mpeg (losing more).
You can use DVDxDV for this: http://www.dvdxdv.com/
But only use this method if you need to add transitions and effects since it degrades the video.

To edit mpeg directly use mpeg stream clip: http://www.alfanet.it/squared5/mpegstreamclip.html
But it only allows you to cut out or insert parts into your mpeg file however it keeps the original quality of the input video.

http://forums.macrumors.com/showthread.php?t=90416

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http://www.squared5.com/

MPEG Streamclip is a powerful video converter, player, editor for Mac and Windows. It can play many movie files, not only MPEGs; it can convert MPEG files between muxed/demuxed formats for authoring; it can encode movies to many formats, including iPod; it can cut, trim and join movies.

MPEG Streamclip can also download videos from YouTube and Google by entering the page URL.

MPEG Streamclip is a converter for QuickTime files, MPEG-1/2/4 files and transport streams (.ts and .m2t). It provides high-quality conversion of movies and MPEGs into several useful formats. It is compatible with most editing applications and DVD authoring tools. More details are available in the download pages.

Supported input formats:
MPEG, VOB, PS, M2P, MOD, VRO, DAT, MOV, DV, AVI, MP4, TS, M2T, MMV, REC, VID, AVR, M2V, M1V, MPV, AIFF, M1A, MP2, MPA, AC3, ...