1) How does VBR MP3 work, vs. fixed bit rate MP3, and what are the trade-offs in sound quality between these two approaches?
2) Should I continue to RIP my personal CD collection in MP3, or go with the native iPod format, or both ?
1- To make a long thing short, MP3 VBR uses less bits when there is less music to encode and more bits when there is more. So you should get the "same" sound with a smaller file than using MP3 CBR (Constant Bit Rate).
2- I don't know. It depends on your preference. It depends on if you use the iPod in your car or have an MP3 capable player in there. It depends on if you ever (God forbid) share music with a friend who does not have an iPod.
For me, if I am looking for portable music it means that I am going outside. I'm in a car or flying or biking or whatever. The thing is, I am not going to notice small differences in sound quality while I'm driving or whatnot. It's noisy, the speakers are not up to the ones I have at home, etc. So, MP3 VBR at a decent rate is quite good for my ears.
At home I like to have my music sound as good as possible, so I use a lossless format. And I like APE as a lossless format. There are many reasons, but if I'm honest, I started off using APE and since it worked well, why go try out FLAC or others?
Hope this helps somewhat, but in the end the best way to decide is to look at your uses and then rip a CD to a few formats and see which you like the best in your environment.
One thing about going with lossless is that you can always copy/convert to MP3, AAC, WMA, or whatever to put on your iPod and still have the original sound at your disposal without getting the CD and ripping again.
That is the second best part of lossless for me.