Yikes - now I'm really on the spot... I don't like gambling other peoples' money, but I think you're on the right track. The only things that come to mind that would cause that much heat in the manifold would be retarded timing (caused almost certainly by the knock sensor) or physical blockage of the exhaust gases. A word of caution, make sure you torque the sensor correctly. I don't know the value offhand (somewhere around 12-15lb/ft perhaps??) but too much or too little and you'll distort the piezo element that generates the signal, thus skewing the reading (or damaging the sensor). Let me know how it turns out!
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Chris, Dartmouth NS Canada 70 M-B 280SE, 83 245DL, 84 244 turbo, 90 780 turbo, 92 VW Golf, 90 740 Rex/Regina