Can I do picture in picture when both clips are in a project?

I want to do picture in picture, but the clip I want as the inserted video needs to be edited first so I can't just take it from the event and drag it onto the other clip in a project. If I edit it within the project, it looks like I cannot then use it for picture in picture. What am I missing?

What you are describing can be done rather easily using FInal Cut Pro X, a $300 tool. But FCPX has a steep learning curve and is expensive, so is there a way to do it using a $15 app?
Yes, there is a way.
1) Edit your picture in picture sequence in a new project. Get it just like you like it.
2) Use SHARE/EXPORT USING QUICKTIME. Choose "Movie to QuickTIme Movie" and click options. Choose Apple Intermediate Codec for the compression under Video Options. Give it a name and save it where you can find it.
3) Now, in iMovie, click FILE/IMPORT MOVIE and import the movie you just made into your Event.
4) You can now drag it in to the original project as a Picture in Picture.

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