First off: you are on an unsupported version of SQL Server. You should strongly consider upgrading. I'm sure you are probably tired of hearing that =) But it is a real concern, and something that could potentially be relevant to this problem (in other words, it could be a bug in the version of SQL Server 2005 that you're on).
It's possible that the VLFs are not being cleared because:
Transaction throughput on your system is relatively low, and thus CHECKPOINTs are not occurring, and thus the VLFs cannot be cleared. You can see if this is your problem by running a manual CHECKPOINT on your database, and then seeing if the VLFs are cleared (status 0) after the next log backup. Note that this could be an I/O intensive operation:
USE YourDatabaseName;GOCHECKPOINT;Another possibility is that the VLFs are large, and thus under normal operation your log records can stay in one VLF for a long time before moving to the next one
It could also be a combination of 1 and 2 above, or something else entirely.
It would be helpful if you could post the details of DBCC LOGINFO (you have mentioned summary information in a few places already, but at this point I think the details are needed).
Note that one possible solution to your problem is to simply not do this INDEX REBUILD, thus not incurring the massive log growth in the first place. If the rebuild is being done because of perceived performance problems, you could consider other solutions (updating statistics for instance).
