From a high level view, there are two reasons to transcode: compatibility and file size. Most of your questions and my answers below address one of those two.
Originally Posted by
superapplegeek 
Hey guys I am in the process of updating my library so I can a. save some space, but mostly to get rid of the bothersome .vob, .ts files and be onboard the format of the future which undoubtedly h.264.
H.264 is the flavor of the month (well, half decade). H.265 and others are already in the pipeline. You may be encoding today for your PS3 and buy a new iDevice next year with completely different requirements even though they both play H.264. Storage is cheap (you can store about 1000 hours worth of DVD video for $150), so my recommendation is to keep your source material around and transcode as necessary for your current device.
Originally Posted by
superapplegeek
a. Quality. From a non purist pov, is there a significant decrease in quality in terms of transcoding a video, I have for example a few yoga dvds, will these take such a significant hit from the transcoding process? What material lends itself better to transcoding, and are there any settings to make sure that (despite maybe longer transcoding) times the material gets the best treatment possible?
No, you can get reasonably close to the quality of the original with reasonable settings. High quality material lends itself well to transcoding. With low quality material the new encoding is trying to reproduce all the artifacts/noise of the previous encoding. Just using H.264 already pushes you toward the "takes longer, looks better" end of the spectrum, although there are still settings that will trade off longer encodes for higher quality.
Originally Posted by
superapplegeek
b. Container format. Which one is the most fool proof in terms of future development, support by standalone media players etc. etc. I have heard some great things about .mkv, but I am willing to sacrifice quality to go with a more compatible format such as the apple backed .mp4. And having said that, how long until mainstream dvd players, or hard disk media players support .mp4 on a large scale. Will .mp4 be able to include dvd menu items etc. (I doubt it…and that is an issue).
Containers are all about compatibility and features; nothing to do with quality. Matroska is great for features (it supports everything), but is not as widely supported as MP4; notable support deficiencies include just about everything Apple. M4V is the same thing as MP4, just a different extension to please Apple (they refuse to support some features if the extension is MP4 instead of M4V). Modern set top boxes generally support MP4, although there are plenty of $20 DVD players that only support AVI. No widely supported container supports DVD-style menus.
Originally Posted by
superapplegeek
c. Ok, we've all heard h.264 is more efficient but how much more efficient is it? Can someone provide a rough estimate, say 10% or 20%. Which of course translates to bitrate, is there a rule of thumb for it, so for example would a dvd or an mpeg part 2 (divx) bitrate translate to a 10-20% lower bitrate for h.264. How can one gauge that?
A 40-75% file size reduction is typical for playback on computers or TVs from DVD sources. DVDs typically run 5Mbps video plus 1Mbps audio (from multiple tracks); H.264 reencodes at full resolution from DVD sources typically run 1.5-3Mbps video plus 0.1-0.5Mbps audio (one or two tracks). If you're targeting a mobile device like iPhone or iPod for playback, the reductions are even larger; typical bitrates will be 0.4-0.9 Mbps for video plus 0.1 Mbps for audio, an 80-90% reduction in file size.
From DivX, XviD, and other MPEG4 sources you'll see smaller decreases in bitrate since they're already compressed with a relatively efficient codec and generally lower quality (see my answer to (a.) above). The primary gain from transcoding these is compatibility with your desired playback device.
Originally Posted by
superapplegeek
I know handbrake, but why is it such a pain in the … to transcode dvds with it - it not recognizing (with my wrong settings perhaps) the structure and interconnection of the various .vob and .ts files.
Huh? There's no connection between VOB (which are MPEG program streams) and ts (which are MPEG transport streams). What is the provenance and process so far with your source material? Handbrake's support for DVD metadata (titles, chapters, etc) is quite good when the source is properly acquired.
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