which version iMovie?

Can you describe in a bit more detail what "image quality is horrible" looks like?

Since the SDR-S26SD camcorders record standard definition video to flash memory, generally speaking, iMovie does not deal well with the MPEG2 video files (I don't remember if they are MOD or MPG files). If the longest record time is selected, this will compress the recorded video the most and will result in poor quality video. ALWAYS use the least amount of compression through the capture and edit process. Compress only as the LAST step after the editing is complete and the project is final.

To get the video to a format from MPG or MOD files to a useful format, use a transcoder like MPEG Streamclip
http://www.apple.com/downloads/macosx/video/mpegstreamclip.html
to convert to MOV or MP4 format, then drag the converted files to iMovie...

In the case of the SDR-S26, record in XP mode... this allows for only a 10 mbps data stream, but is the best it can do... the DV camcorders recording to miniDV tape are recording at a 25 mbps data stream. More video compression = more discarded data = reduced video quality. Higher data stream is better. In the SDR-S26, the XP mode will provide terrible quality video at 2.5 mbps data stream.

If the scene has fast action, video will be poor. Lots of video compression and fast action do not get along.

The SDR-S26 says it can get to 6 lux for lighting. At that level, the video will be grainy. This is common to camcorders with small lenses and imaging chips. The resolution is to add light. If it is a dark scene, record under good lighting, then use the editor to darken.

I'll hold here and see how much more you want to dive in...