BMW Repair: Temperature Gauge Pegging, bavarian autosports, coolant level

Question
The sensor I replaced was the one right next to the thermostat.  I haven't replaced the radiator cap.  The electric fan is working just about every time I've worked on the ca: I've spent hours trying to bleed air out of the cooling system.  I don't see how any air could remain in there.
Got a tip to check the engine core temp using the OBC; it reads -124 deg C when the gauge is pegging, and 78 deg C when it drops back to normal after a couple of minutes.  I'm told this indicates a faulty thermostat even though I just replaced the t-stat a couple of months ago.  Does that sound reasonable?
OBTW, the gauge pegging also trips the "Check Engine Soon" light about 25% of the time.  Using a Bavarian Autosports code reader, it's storing an error for the temperature sending unit. I've reset that error code numerous times in the course of this ordeal.
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-----Question-----
Recently replaced the radiator on my '98 540I (broken plastic neck -- of course), then the temperature gauge started pegging when the engine gets close to normal operating temperature. It stays pegged for a few minutes, then drops back to normal. I've already installed a new thermostat and temp sending unit but neither has helped. Coolant level is fine. Any ideas on what's up?
-----Answer-----
Mike which temp. sensor did you replace? Where is it located? Could be the gauge itself. Haven't run into that often. The instrument clusters are fairly crappy in the E39 and E38 models. Did you replace the radiator cap? Is the electric fan working when this happens?
-Evan

Answer
Mike, what is the last seven digits of the VIN number? What is the engine core temp you are speaking of? The on board computer on the dash doesn't show actual engine temp. I am confused as to where this reading is. Depending of the Production date of the vehicle there is bulletin to reprogram the engine computer for Activation of Map Thermostat fault 139 or 140 (BMW specific fault code). Your fault is with the temp sensor though. Have you verified that the engine is actually getting overheated or not? Make sure the system and the Cap are holding pressure. You stated the electric fan is working normally is the Mechanical fan clutch engauging whent the engine is very hot (Usually takes 15minutes of 2500-3000rpm with vehicle stationary to get it hot enough) The fan will produce enough air to feel it at the base of the windshield when the clutch engauges. Please check the wiring for the Thermostat and Temp sending unit. Most important is to check if the engine is actually getting hot or if this is purely an electical issue. I would use an infrared pyrometer gun on the thermostat housing at normal operating temp. and when the gauge shows over heat. Make sure the heater is on and at max temp. it doesn't need to be at max fan speed. The electric fan should kick on well before the Mechanical fan clutch engauges. Usually 95 degrees C. Hope this gives you some direction Mike. Be patient you will find the source.
-Evan