I've been asked a few times about different aspects of rebuilding these things, and I thought it might be a good idea if all this was in 1 place, so here goes. Feel free to critique away!
If you have your car long enough, especially if you bought it with mileage on it and the transaxle was used (and history not known) to begin with, you may (sooner or later) face this task. You can look at it as a chore (and as any of you who have removed and then re-installed a transaxle know, it is) but if you're any sort of optimist/glass half full person, there can be opportunity here. Spend some time (before removing the transaxle) thinking about the gearing you have while driving and ask yourself the following questions- would I like to be able to drive it harder and not worry so much about breaking? am I happy with the highway speeds the car is capable of? does the granny 1st gear bother me enough to consider the cost of changing it? would I like more traction in the back? does the gearing suit the driving I like to do? do I like to drive long distances and romp through the gears enough around town enough that the idea of closer 1st through 4th spacing and a taller 5th gear is attractive? These are just some of the things to consider.
First thing- who will rebuild it? Yes, there are several trans shops in California that have good reps with VW transaxles, but if you're not close, the added shipping expenses will add up considerably. And if, for some reason it has to go back (the guys there are good, but every once in a while even the best mechanic overlooks something and has a come back), you're hit with the shipping charges twice. The freight company makes out like a bandit, but that's about it. And just think of the things you could have spent that money on...
What I'm suggesting is to reach out to the local VW community- meet 1 or 2 of the guys with fast cars in the local club (trust me, they're out there), or ask around at the local VW show or swap meet. If there's racing going on locally, all the better, as there will be someone knowledgeable about transaxles around. If you're a hands on guy he may even let you help with the lesser chores, cleaning up the case and side covers, maybe helping with the disassembly and washing all the parts before they go back together. He'll appreciate the work and you'll also be supporting the local economy, instead of spending your money with someone (for most of you) hundreds or even thousands of miles away.
My friend (and local trans guru; this guy's knowledge about these things is encyclopedic!) Bruce Tweddle tells me there's another reason to consider someone closer to do your rebuild- most of the transaxles that are available to the shops as cores down south have siginficantly more mileage on them than the units we'll find in the northern more states (and provinces). A lot of the cores that Rancho (and others) use have already been rebuilt 2, 3 or 4 (or ??) times and a lot of stuff (especially the shift rod bores in the gear carrier and pinion/mainshaft bores in the main case) is just plain worn out. And yeah, I know the gear carrier bores can be sleeved, but I haven't heard of a way as yet of fixing the main case itself. If you do deal with Rancho (or any other "big trans rebuilder") it's worth the effort to send them your core and specifically request getting yours back.
Typical strengthening techniques (Rancho calls them their "Pro Street" modifications) are welded 3rd and 4th synchro hubs, super diff (adds 2 spider gears), "heavy duty" side cover on the thrust side (the subject of great debate as to whether it's actually needed, especially at this stage), hardened keys, chrome moly pinion nut (and I forget what else) and as anyone who has scrambled a stock trans (possible even with a stock 1600- and don't bother asking how I know; all I will tell you is I was much younger and there was beer involved!) will tell you, it's well worth it. The VW transaxle was engineered to withstand normal every day driving with 40-60hp and it does this rather well, but a lot of us have engines with 100-150 (and even 200) hp. Even a 1600 or 1776 with a mild cam and dual carbs is an almost 50% increas in power, and is a stock trans killer. Without some beefing they don't last long with any kind of "spirited driving". Whether you're buying from Rancho or having someone more local redo the trans, don't cheap out here, because it will come back to bite you (hard), and it may not take very long.
If your car hops when doing a burnout, or drag race (full power) start, even the best trans build won't last long. The rear suspension hopping under full power will break spider and side gears, the r&p, which destroys the fit of the mainshaft (or is it the pinion) bearing hole in the case; the point is even the case will need to be replaced at this point. Now you're out looking for a good core to start again. The hopping is caused by the frame horns flexing as the power loads and unloads as the tires spin and then grip repeatedly. A kafer bar and midmount (and engine mount bar if your car has the support in the back to mount one) will stop this.
For most 4 speed owners, although there are taller 4th gears available than the stock .89, leaving 1st through 4th alone (and preserving the stock gear spacing) makes the most sense. Changing 4th to a .82 may seem like the answer, but lengthening the 3-4 spacing will make the your car awkward to drive; there will be a 5-6mph "hole" where you're turning more than 3500rpm in 3rd (could be a problem in the summer heat) and in 4th the engine speed hasn't yet hit 2400rpm, and at these higher road speeds the engine isn't running fast enough to cool itself under all conditions.
Coming up in part 2- taller ring & pinions, taller 1st gears, closed differentials and 5 speeds...