You really don't want to see the quality drop that much. You'll need to use a much higher bitrate than 1000kbps when going to mpeg2. It is just not suited to such low bitrates, certainly not like xvid or divx. I normally encode to 6000kbps, but since you are trying to fit more onto your dvds, you can probably drop it down near 3000 and see if you like the results.

Are you using vbr or cbr encoding? I almost always use variable bitrate encoding, so you might set the average at 3000kbps, low at 1500 and high somewhere near 5000. This way you get better quality on action sequences, and don't waste space on slow scenes.

If your source is 128kbps on audio, there is no advantage going to 160kbps. You're just spinning your wheels and taking more room. I'd leave it alone.