The answer to that question is to install update 4.1.
VOB extension support
Unfortunately many VOB files are non-standard which causes problems for PPro.
The link I provided is still the best advice.
Yes, the DVD-Video contains compressed MPEG-2 material. It will never be as good as the original material. If you can get the original footage (file size and transport medium will be an issue, but there can be various ways to overcome this). My first choice would be an external HDD shipped in proper packaging. FTP would be a close second.
Besides Eddie's linked info, you might get some useful info HERE. The article is based on Encore, but much will also apply to PrPro.
Is there a reason he did this or is he just stupid?
I'd vote the former, and have him correct it. Original I-frame media is always the best choice for editing.
Yes, as many knew, VOB's can be different. The 4.1 inclusion of support for that format is good, but will never be universal. Just like "AVI" support can never be uinversal because of the possible "alphabet soup" that can be contained within. 4.1 should help most of those with a pure Adobe workflow. Throw in other DVD creation software and hardware, and all bets are off.
Until everything is universally perfect (never gonna' happen), there's still the "old-fashioned way," rip and then process, prior to Import. It's going to be that way for a very long time.