Passat (B5) :: Check Engine Light Is Flashing / Car Is Shuddering

Let me start with some background. 2001 B5.5 Passat Sedan 1.8T 5spd Completely Stock 156,000 miles. So, tonight i head for the grocery store about 5 minutes up the street. I get about half way there, when I notice that the check engine light is flashing. I ease off the gas, and coax it to the next light. At the light, the car feels like it might stall out, and the car seems to shudder, and I notice that the shudder is connected to the RPM of the motor. Meaning, if i rev the motor the shudder gets faster.

I manage to coax the car home to my driveway, and I leave it in a position easy to be towed. So, i figure that I will leave the car running, and look under the hood, but as soon as I open the drivers door, i can smell something burning/smoldering. I shut off the engine, and carefully open the hood. I find no smoke or fire, but I see that the downpipe (or whatever pipe the exhaust coming from the turbo leaves through) is glowing red hot.

I am not sure what happened. The car gave no other obvious symptoms. The other things I should mention though, are that I change my own oil. Always Mobil 1 with a Audi or at least german filter. However, my father was the original owner, and for the first 60k he used conventional oil. The turbo has always been strong, and seemed to deliver full boost. I do not know if it is still boosting in light of recent events.

For the last few weeks, the check engine light has been on and off. My mechanic scanned it a few times, and told me that it was the "Air Injection Pump Code". My understanding is that this system basically divers exhaust gas into the Cat when the car is warming up. If its not working properly, then it is just a emission problem.

I should also mention, that the car has recently been leaking a little bit of water when there is a hard rain storm. On Saturday, I took the rain tray cover off, checked the Pollen Filter, and removed the battery in order to clear out the drain plugs under the battery tray, and the brake master cylinder. As I write this, I begin to wonder if its possible that something just went very wrong with the Air Injection System.