The re-encode process from MPEG (VOB) to H264/XVID (AVI) will always have quality loss in DVDFab. Only VOB Passthrough is lossless on DVDs. I do seem to remember an old method of turning off compression in other programs but the file size was massive (essentially a 720x480 uncompressed image for each frame). I haven't heard of that being used in a great while.
As far as bitrate, you are comparing the average bitrate in DVDFab with the maximum (a.k.a. peak) bitrate allowed by the DVD specification. The newer codecs are more efficient than the older MPEG2 so they should take less space. If you truely cannot work with the MPEG2 as the source then you might set a file size limit equal to the source file size rather than setting the average bitrate. BTW, if your editor doesn't recognize the file after VOB Passthrough try changing the extension to MPG.