Most persons who say "yes" here appear to be ignoring Ken's
admonishment that it is ILLEGAL.  Most words one hears
regarding engine swaps is that newer is OK but vehicle must
then meet emission standards for the year of the engine.
One reason air cooled engines aren't seen much anymore is
that they generally produce more emissions.

Regarding interior heat.  If you need a heater where you
live, you'll need an auxiliary gasoline heater in your air
cooled Vanagon, as the engine-derived heat is nothing.

My Vanagon is an '81 (air cooled), but I would never deceive
myself that it's better in any way than a later water cooled
Vanagon.  Having been on this list for 9 months now, I'm
pretty convinced that if I had a wasserboxer with engine
problems, I'd look seriously at an inline (4- or 5-cyl) VW
conversion.  Never would I look at the air cooled option,
nor would I consider putting a water cooled engine in an
older Vanagon that came air cooled.  Given that Vanagons may
be the world's greatest bargain (can anyone justify ?$ for a
neon when Vanagons are $4000?) there is no economic sense in
doing this.