Fender rust on the driver side and then the passenger side wheel well
Difficulty: 1/5 if it's not bad, 5+/5 if it's rusted and you want to repaint it yourself without having body work or painting experience
back to 1000q: the turbodiesel FAQ and mk4 "how to" index (1999-2003)
back to 1000q: the "how to" list and FAQ for pumpe duse mk4 cars (2004-2005.5/2006)

Introduction

VW put soundproofing in the front wheel wells of the MK3 and MK4 diesel cars to help absorb sound.  Unfortunately, it also absorbs moisture and road salts. The official fix is to trim back the foam or repaint or replace the fender if it is already rusted.  If you want to trim the foam, this is only a difficulty of 1/5.  If the paint is a little flaked off, trim the foam, spray some rust stopper and apply touch up paint to the area.  The good news is that many dealerships will repair this for free but many will also put up a fight.  See 1000q: paint codes for your color touch up paint.  For some reason, it tends to show up on the mk4 cars a lot more than the mk3 cars.  It often also shows up on the driver's side first.  Please note that although some dealers will refuse repairing this, there are many reports of dealerships repairing it free of charge, even after high miles and being out of regular warranty for a long time.  If you are refused repair, try another dealership because I estimate the cost for a bodyshop repair is over $1000 if it has eaten into the metal.

If you want to remove the rust and repaint the fender it's a 5+/5 if you don't have experience doing body work.  A tutorial on how to do excellent body work is way beyond the scope of this website since it requires a lot of practice.  In other words, if it needs anything more than a little touch up paint, leave painting and body work to a professional. 

For a quick repair, cut the bottom tip of the foam soundproofing away from the fender liners as seen below so that water won't soak against the metal fender.  For a more detailed solution, see the TSB description below, which could involve repainting the entire fender or replacement.  If the fender is repainted or replaced, check for proper panel fitment, gaps, and quality of paint.  Open and close the door to make sure it's not touching.  If you are handy, you can even go to a junkyard and get a prepainted fender and replace it yourself.  

Thumbnail gallery, click for larger detail.