Reading your post, my first instinct was headgasket...then I came upon the "second guy" who said it as well.
To be honest, it's not a hard job to do by yourself, as it is just time consuming. If you can do it yourself and feel comfortable doing it yourself, I'm willing to believe that you might be able to save yourself $250-$300 if you DIY.
Then I found this:
http://bimmer.roadfly.com/bmw/forums/e38/6657229-1.html