I was really hoping it wouldn't come to this, but...

As I've posted in the last week or so, my '83 wasserboxer has had a 
chronic overheating problem. A brief description of the problem:
I bought it three months ago, my first watercooled VW. The temp and 
fuel guages didn't work, changed the voltage stabilizer and checked 
with meter per Joel, all seemed well. The temp guage rested somehwere 
between 2/3 to 3/4. Ran great, took several 400 mile trips with no 
problems at all. Had to change the alternator about two weeks ago. 
Immediately following, the guage began creeping to full mast and light 
began blinking. Checked the coolant and it was ok. Tried to bleed the 
system per the archive instruction and could not get all the air out. 
Just when I thought it was bled, I would go for a drive, it would heat 
up, I would jack it up, and there was air!. Took everybody's kind 
suggestions and checked the guage again, the rad felt hot, the fan 
wasn't coming on (I tested the switch and it was OK). In desperation, I 
took it to a garage close to work and asked them to test it. They said 
they checked the radiator, thermostat, the fan, and tried to bleed it 
too. They said the fan wasn't coming on when overheating but came on 
when AC was turned on. They checked the fan and found the switch OK 
too. They then checked for combustion gas in the coolant by using some 
blue colored chemical. Well, they say there is combustion gas in the 
coolant and say this is also why the fan isn't coming on, something 
about the sensor.

So, I desperately need advice on verifying this. Did I forget anything? 
Should I recheck? A second opinion? A local vw specialist (not a 
dealer) said it would run about $1000 :( I've never done any kind of 
repair to this scale but I'm not afraid to learn and try. Should I be? 
I've printed all the applicable articles from the archive, got my 
Bentley. Anything else? Any advice or opinions would be greatly 
appreciated!

tony