Hi,
The temp gauge will be showing you the engine temp, rather than the coolant temp so will still move into the red when the coolant is not being pumped. Have you checked to make sure the belts are on correctly and turning the water pump wheel as they should be? If this is all working, then I would look at changing the water pump - seems they are notoriously bad.
Here is a link to the procedure:
http://www.bimmernut.com/forum/showt...ght=water+pump
Make sure you keep an eye on the temp even after doing this in case something further has been damaged in the overheat. (Hopefully it won't have been).
May also be worth looking into changing the thermostat, hoses and the fan clutch if you are not sure on the vehicle history while your there, as you'll have access to them during this job.
HTH