I'd like to share a recent experience I had with my '97 850 T-5. I'm just adding this to the collective share of knowledge in the hope that it might help someone.
Early this Spring, I noticed that the temperature gauge on the car was not rising more than a few millimeters above the lower red line. Because I was doing a good bit of traveling, I didn't have the time to do anything about it, so I drove about 1500 miles in this condition. The entire time, the check engine light did not come on and when I put my OBD-II code reader on it, all codes were 0000.
So, there are two possibilities: a temp sensor is defective or the car really is running cold. Thinking about it, I decided that if there was a defective temp sensor, there would have been codes from the OBD-II, so I concluded that the engine really was running cold and I simply replaced the thermostat.
I took the car for a short drive, and the temperature gauge rose halfway up as it normally does. Problem solved.
Then, I checked the oil. Horrors... I had water droplets and rust on the dipstick from about halfway up all the way to the top. Also, there was a bit of that "chocolate mousse" emulsion on the bottom of the dipstick. Conventional wisdom screams, "blown head gasket!" But usually, with a blown head gasket, the car will run hot rather than cold.
Also, the coolant level had not dropped and the water droplets were clear. Could it be that condensation had built up in the oil during the "cold running" period? I immediately changed the oil (it was black and nasty looking even though it only had 2500 miles on it), and I have checked it numerous times since. There has since been no sign of water droplets and the coolant level hasn't dropped.
As an added precaution, I had my mechanic "sniff" the coolant reservoir for hydrocarbons when I took it in for its annual inspection; none were detected. Where I live, Pennsylvania, OBD-II equipped vehicles pass the emissions inspection if no codes are showing, so they don't put any probe into the tailpipe.
Bottom line: The presence of water in your oil and on your dipstick does not automatically mean "blown head gasket." Look at other possibilities before you shell out big bucks.
Your post reminded me of a little known fact concerning any type of coolant leak, whether it is a blown head gasket, a leaking fitting, a hole in your radiator, etc... Unless you live in a hot climate this should work just fine but keep your eye on the temp and the water level...
Take the pressure off your cooling system by loosening your radiator cap. The water is kept under pressure to allow for a higher water temp before it starts to boil but this also means that it is more likely to squirt out any holes in the system. I was able to drive my 240z for 2 years with a blown head gasket by making sure I never tightened my radiator cap past the safety setting. I live in the S.F. Bay Area so temps aren't that bad here so cars rarely overheat, even at the new unpressurized level. I just added water every so often and kept and on the temp when sitting in traffic and it worked fine. Abviously it is not as good as fixing the blown head gasket but it is a really easy fix especially if you are in an emergency. I haven't run a test yet but the different in water loss through a hole in the radiator under pressure and not unders pressure is probably pretty big.
If you are driving in Texas in the Summer this probably won't work but it is still a good fix if you are stranded.
Thanks for the post --- I had EXACTLY the same situation happen to me (temp needle just above cold, had to continue driving for about 2K...then rust and gunk on dipstick followed by mild panic.). I did the same as you, with the same result.