VW service manual says to set cam to #1 TDC, and install caps #2 and #4 first. Torque down alternately/diagonally. Final value is 20NM. It doesn't say, but I'd do it in 2 stages.
#1 cap, is next to pulley. Then do #1, 3, and 5 [I assume zig zag, although it doesn't specify]
Thanks Mark, I will follow that procedure... carefully!
I had similar cracks with my MF and even had slightly worse damage on my #1 piston. I worried the issue for days, then decided to roll with it. 65'000 kms later and no problems at all. Unless you are gong for mint, there is no harm in going with what you see. As others have said, there can be much, much worse. These engines are damned near bullet proof. Being as it is going into a doghouse, I would have the pump reconditioned as well as the injectors. And change every hose and belt you can see! That should buy you a couple years.
Turftech,
I have not reconditioned the pump, but I do have a rebuilt one sitting on the shelf waiting for the day I need it so no worries there. I picked up the injectors today, they look great except that the shop engraved six-digit numbers on them... what's with that? Their own serial number? I thought they were MY injectors.

Belts are all new, hoses will be as soon as I get a configuration I'm happy with (I think I'm getting close). Checked my log book and the last time I put fuel in the bus was August 2009! It's time to get this project rolling again so I am going to try to pick up the pace. Thanks for the reply,
-David