i found out alot about this problem a year or so ago.
heres the links i found..........
http://www.scirocco16v.com/tech/sms_syndrome.htm The problem has become a classic one for VW owners with close-ratio gearboxes: sudden & catastrophic failure of the normally well-mannered and durable gearbox. The 020 is a tough tranny, one that stands up well to the abuses of hard driving and the added torque from such upgraded powerplants as a Techtonics Tuning 2020 motor or a turbocharged engine. Now, stock transmissions, carefully driven, are failing when the differential eats it's way through the case.
IDENTIFYING THE CULPRIT
Those transmissions built with serial numbers up to 14102 (gearboxes up to October 14, 1982) have snap rings installed on the differential pinion shafts. Those boxes do not usually have any problems. Cars with the wide-ratio gearboxes do not seem to have the problem. The cars affected include GTIs and GLIs from 1983 to 1986 (both A1 and A2 chassis), 8-valve Sciroccos from 1983 to 1986, and 1984 to 1986 Cabriolets. These cars had close-ratio gear boxes starting with serial number 15102 (gearboxes built after October 14, 1982) and up, and did not have the snap rings installed. The grooves are still there, but apparently some engineer at VW dreamed up the idea of using a larger head on one of the rivets as a retainer and doing away with the 15 cent circlips. The special rivet is simply not able to properly retain the pinion shafts. Under even normal driving conditions, there's a chance that the pinion shaft works itself out, let's things tilt around and eventually machines a hole in the transmission case. Shop supervisor Paul Boot at New Dimensions said that most of the failures they've seen occur between the 50,000 and 120,000 mile mark. One somewhat limp "cure" that VW has incorporated is to use rivets with a thicker head. This still won't provide the positive location of the shaft afforded by the circlips, but at least it takes longer for the pinion shaft to pound it's way through. No one we've talked to has taken apart a late-model non-16v close- ratio box, so we're not sure if VW continued with the rivets or has returned to using the circlips. On the gearboxes used with 16v motors, VW has resorted to using the circlips again. For VW's service differential repair kit (#171-498-088) used when replacing the ring & pinion (either when changing ratios or as a service replacement) the rivets are replaced. The kit included eight studs and nuts (to be used in place of the rivets), washers, retaining bracket - and two circlips.
The first symptom that your beloved car has been attacked by this design flaw is a gear oil leak under the transmission and, perhaps, strange noises from the gearbox. An alert driver will notice it right away. Most gear oils have a distinct appearance. (It's thick smelly stuff) Note that a failed differential side gear retainer is not the only source of a gear oil leak. Leaky side seals or a worn-out output shaft seal are other potential sources. Both of those tend to be slower, smaller leaks then a case that's ground through. Don't worry - if you miss the first hint, you'll get a second chance. Like most second chances, this one can be a bit more expensive than the first. You'll notice it when all of a sudden, your clutch fails, but strangely, when you check the adjustment, it's okay. One symptom of a slipping clutch occurs on a long upgrade, when the engine revs climb but the road speed stays the same. Is it all over at that point? Will everything in your tranny be trashed? At this point, we would hate to call it a credit to VW engineering, but here we go: When to retainer rivet fails, the hole is ground high enough up on the case that it does not immediately drain all of the gear oil. With time, it will continue to pump more and more out. The first damage is "just" the clutch and pressure plate. As the gear oil level drops, the next thing to go is fifth gear, soon followed by the rest ofthe gears. In short, many of the affected transmissions are repairable, if you stop driving the car immediately. That includes towing with the front wheels on the ground too.
