Jen, it sounds to me like your intermittent blower problem is in the switch
itself.  Could be in the blower motor or loose wiring, but I'd first try the
rotary switch on the dash because it is inexpensive to replace - available
from Bus Depot for about $10 and not hard to install.  You remove the old
one by taking off the heater control plastic plate, then the switch pops out
the front (a screwdriver carefully used will help compress the spring clip
holding it in place).  Check the wires in the back of the switch at that
time to see if any are loose.  You might need to trace the wiring back to
ground and to the heater blower, but I'd do that as a final step because of
the hassle.  Could also be bad resistors at the blower, but that would
require pulling out the heater assembly and splitting it open.
The dropping temp. when you cut in the heat may be due to the effectively
longer coolant circuit when your control valve opens up the hoses and heater
core, but I've never noticed that when turning on my heat.  Other members
will have a better idea than me on this.  Like yours, my temp. guage never
rises above the warning light and yet I have plenty of heat.

> I have been having a problem with my heater.  First of all my 1 setting
does
> nothing, it does not blow out any air at all.  When I turn on the heater
to
> 2, warm air will come out for awhile but then suddenly shut off.  If I
turn
> it on 3, same thing fine for awhile then turns off.
> Please note the following:
> It will stay on for about 10-15 minutes before turning off.  After it has
> turned off in the 2 postion, if I have to play with the knob it will
> sometimes come back on.  While playing with it, I also notice that the
dash
> lights flicker a bit.
> Also note that my temp gauge never really goes beyond the light indicator
> and when I put the heat on it tends to drop down to around 1/2 between the
> light indicator and bottom