You have dug up a thread that is nearly three years old. I doubt you'll get an answer from reboot.
DVDLab is an authoring tool. It puts compliant mpeg2 files into dvd format and allows you to make menus. It cannot reduce the size of your dvd to the size you want, or convert to avi.
It can demux vob files and give you elementary streams, but that doesn't get you near your goal.
How large is the dvd you have now? Are you sure you want to reduce it to fit onto a cd? That would be about 700 mb. If you are going to do that, I would use AutoGK and convert to an avi file using the xvid codec.
Fair Use Wizard, or the free, Celtic-Druid version of Fair Use Wizard can also do this, though they work from a disk image rather than files.
You can find more information about these programs over at www.videohelp.com
It is easier to fit dvd movies, especially commercial dvds, onto dvd recordable blank disks. They hold about 4.3gb. Reducing the size with DVDShrink is simple and reasonably good quality. You can also use a good free encoder based program like DVDRebuilder if you need more than a small amount of compression.