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		Possibly warped head or head gasket, also just because the temp gauge didn't reach the red doesn't mean the engine hasn't over heated! As soon as that gauge moves from its normal position pull over and turn the engine off! By the time you get to the Red it can be waay to late! Especially if your already lost some coolant! Hopefully it's just the thermostat as that's a lot cheaper then rebuilding a motor! But if your still getting a swollen tight top hose with no/replaced thermostat then my guess is a gasket! Best of luck buddy
	 
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		Thanks for your contributions and the analysis. All put together really makes sense, especially the last comment from Disco2_Dan that summarized all of the above comments. Oh, boy, so now I need to have my engine checked. Let's hope it was just the termostat and the swollen top hose (after the incident) was just temporary. I may have put too much water into the system, I need to check the coolant levels again and monitor the top hose for hardnes.  (and go to the shop to check my engine). 
What I am a little (of a lot) upset with is that I had requested my mechanic to replace the thermostat 4 months ago, and in my view that should not fail, but it did (and may have screwed up the gasket). So maybe he didn't replaced and just told me he did. I should have done it my self, grrrrr....
	 
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		http://i2.photobucket.com/albums/y20...lingSystem.jpg
heres the flow diagram for the tdi, coolant flow through the heater is not dependant upon the thermostat opening.
On that note you shouldnt be able to force the thermostat open, without any heat its going to be held closed by the wax pellet.
if your heater worked before you cooked the engine and it isnt blocked or internally bypassing now then the problem is coolant flow related. check out the position of the heater hoses and the normal direction of flow (unlike the td5 it doesnt change direction at any point) and see if you can tell us why the heater stops working very early on in a low coolant situation. now would reversing the flow direction make that any different.
now for extra credit.....
note that the location of the temp sender is up on the thermostat region and they dont work as well when they are not immersed in coolant. Given the hieght of the outlet for flow into the heater matrix how much circulation would there be through the head by the time that 
a, effective flow through the heater matrix ceased
b, effective flow past the thermostat and therefore the temp sender ceased?
	 
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		UPDATE:
Engine was inspected by my mechanic, compression and gasket are all fine. 
IT SURVIVED!!
Thanks to all for your contributions!
	 
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		Great news for you. Now for the the other issue of no flow eh?