Temp gauge 1/4 mark was normal when I had a 2.0L engine and the heater worked great.
The original heater would be 33 years old now so a good flush and backflush would do no harm. Taking off the fresh air scoop at the rear of the engine bay enables you to get at the hoses.
As per Peter a cheap infra red sensor (Maplins do them cheap in the UK) is a good idea.
These are very useful at chasing round hot or cold spots in the cooling system. Just point it at a hose or thermostat housing.
Adam
TR7 V8 DHC Jaguar Solent Blue. 9.35cr Range Rover V8, Holley 390cfm, JWR Dual Port, 214 Cam, Lumention, Tubular Manifolds, S/S Single Pipe Exh, 3.08 Rear, 200lb Spax & PolyBushes all round, Anti- Dive, Strut-Top Roller Bearings, Capri Vented Discs & Calipers, Braided Hoses, 4 Speed Rear Cylinders, Uprated Master Cylinder & Servo, AT 14" 5 Spokes or Maestro Turbo 15" Alloys, Cruise Lights, S/S Heater Pipes, Replacement Fuel Tank. No Door Stickers. Mine since July 1986, V8 from 1991