I spent some time over the weekend working on the M20 while it sits on the stand. Replaced the timing belt, tensioner and water pump (first time ever for all three) - I was psyched! Then I started doing some more reading on the cooling system and it seems to me that if I want to use an expansion tank, I need an earlier style water pump that has the inlet that connects directly to the expansion tank. Looks like I'll be replacing the water pump again. See diagrams below...

In this photo the expansion tank is connected via p/n 13 and a "T" in the hose coming off the thermostat housing. This is how my engine is currently setup.
http://www.realoem.com/bmw/showparts.do?model=1113&mospid=47309&btnr=11_1167&hg=11&fg=35

In this photo (earlier model 325i) the expansion tank is connected directly to the water pump via a second inlet/oulet. Consequently, there is no "T" coming off the water hose (p/n 18) from the thermostat housing.
http://www.realoem.com/bmw/showparts.do?model=1113&mospid=47309&btnr=11_1168&hg=11&fg=35

If anyone sees this different, please let me know! Thanks.
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'71 2002 M20 Conversion Blog