Dave - Thanks. I just looked up some info on the internet and it appears that's what the system is. A recirculating system.

However, I still don't quite understand how I can set it to "B" on the thermostat and still have fairly cold water when the hot water is turned on. To me, it should be pretty darn hot when set to B (and I put it on that setting the other day, so it wasn't like I just did it 10 min ago).

So, I'm not quite sure what to do now. I don't know if I should turn the thermostat closer to A now (the hottest setting) or maybe try and figure out something else being the cause.

I wonder if the pump for the recirc system is bad if it could possibly mix the cold and warm water together and cause the "hot" water to become luke warm instead of just keeping it "hot" like it should be?

I think in our previous house we moved from, we had the thermostat set to C (a lower setting) and we had actual steam come from the water out of the faucet when you would run the hot water for a min and that also had the same type of recirc system on it. So, something is amiss somewhere.

Anyway, thanks for the info! When I'm more "mobile", I'll have to check it out and look into it. Supposedly there is supposed to be a "return" valve hooked up to the faucet furthest away from the water heater for the return of the cold water, but I didn't see one where I think it should be, but I'll have to check under each sink when I get a moment.