Cold engines run very rich and ignore the O2 sensor...that's called 'open loop.' That might be the root of your problems, fixing it can't hurt. Even if it isn't causing the emissions to fail it's really hard on the engine. I'd assume that the new O2 and plugs will help, but I'd save my inspection payment until I'd cleared up the temperature problem.
So I'd highly recommend testing the temp sensors. But (disclaimer!
) I haven't worked on an e36 yet (though the Ti is such a tempting little car), so please double-check this info...
Both the coolant temp and AFM air temp sensors get a resistance test. The gauge runs off it's own temp sensor (rear plug on the driver's side of cylinder head), so make sure you're testing the right one...the DME sensor has two terminals (and it's closer to the front of the engine), the gauge sensor has one (and it's further back). According to the BMW repair manual, both the AFM and coolant temp sensors have the same specifications. A cold sensor's resistance (spec is 58degF) should be about 2500 ohms. Hot (spec is 180degF) should be 'round 300 ohms. I'd assume that any temperatures in between can be interpolated.
Could also be a stuck-open thermostat or frozen clutch on the engine fan too. Bleeding the car is a PITA, but it's worthwhile to fix it. You should get better fuel mileage as a result too.
Thanks. I'll go find that temp sensor and see if I can check the resistance. The outside temp here is in the 40s so it's a bit cold to be working on the car. I guess that's what I get for not want to take it into the shop and pay an arm/leg.
I was thinking the thermostat may be stuck open too and didn't know if there was a way to find that out easily without draining the system. I recall the thermostat is towards the bottom of the engine, right? I'd have to pull off the lower hose and pull out the thermostat?
The stuck clutch for the ran is an interesting thought. I thought it was just my car, but now you've got me thing / asking. So, I haven't seen another E36 318 before. My fan goes all the time. I mean, I turn on the car, and the fan is on. Is that normal? I know that on my other cars (toyota), they turn on when necessary. However, my 318's fan is on ALL THE TIME. Can you tell me if that's the clutch being stuck? (I didn't know the fan had a clutch!)

Thanks again!