Flashing overheating light but does not seem to overheat?

Basically my mk3 polo coupe on a "J" reg and has a few issues..

firstly, the overheat light flashes for a bit after about 10mins of driving but the engine does not seem to overheat, then the light will go off, and then back on again a few mins later..

Maybee its a temp sensor tripping on and off or something more serious?

The exhaust smoked like it was on choke for the whole 20 min journey to.. no bad, just like it would when the engine was cold although the car has been sitting for 2 weeks..

It didnt smell funny, and i am yet to check the oil for any milky residue

Possible headgasket? The brether pipe is totally shot if bu i doubt that has anything to do with it.

any advice would be appreciated or would it be easier to do the 1.3engine swap now and save the troubleshooting kak and bin the engine, its on 95K and looks pretty grimey..

Cheers, Tim