OK, after hours of working it out, I think I have a solution, at least its working for me.
1. Download Aleesoft Free iPad Video Converter.
2. Open up the program and select new task.
3. Open up the video you want iMovies to "see"
4. Select "iPad HD Video (*.mp4)" then click options.
5. On the audio tab, the following should be selected:
-Double Channel
-aac
-44100 sampling rate
-128 bit rate
6. On the video tab, the following should be selected:
-h264 video codec
-30 frame rate
-2500 bit rate
7. On the resize tab, select the custom size and make it 1280X720, aspect ratio normal
8. Click save and apply.
9. Then pick your destination folder and select "Convert"
10. Once its done, put that video into any of your "Photo" folders that syncs with iTunes and you should be able to see the video in iMovie.
Good Luck.