Oil temperature indicator high, any ideas?

[racingbmwm3]

The Oil Temp reading should be coming from the Oil Level Sensor which is in the oil pan at the bottom of the engine near the oil drain plug. The pressure switch you said you replaced is just for the red oil warning light in the cluster to let you know that you have low oil pressure.
Need more info about the engine replacement:
Did you get a used 4.6 motor for the replacement, or a downgrade to a 4.4 (thus the reason for the DME change)? If it's not a 4.6 motor anymore, I'm not sure if the oil temp gauge will function correctly anymore, that signal is sent to the cluster from the DME. So a 4.4 DME won't be sending the same signal to the cluster. Alternatively, was the replacement engine from an X5? Seems there are quite a few small differences between the 5/7 series and X5 M62 engines and this could cause random glitches in the electronics. Its possible recoding the cluster to match the new DME may fix the problem also.

If the replacement engine is a 4.6 motor and a 4.6 DME, then I'd think there is something wrong with the oil level sensor or the wiring to the sensor. It is common for the sensor to go bad and cause erroneous readings.
The sensor can be tested to see if it is giving correct readings, but either the reinforcement plate under the car will need to be removed to gain direct access to the sensor, or it can be tested via the wiring harness in the Ebox.
It should be around $100 in parts to replace the sensor plus another 30min-1hour of labor. Testing the sensor first would probably be around an hour diagnosis for labor. Maybe there is damaged wire or a loose connection somewhere that happened during the engine replacement.

[Secrets]

Yes the engine is a replacement 4.6. Do you really think the temperature is coming from the level sensor? If so then I may have to check it. I took it to the dealer this morning and now they're giving me a quote of $485 just to look at it compare to the initial $140 they told me and they would have to keep it until tuesday. If the temperature is reading from the level sensor, I can take a look at it myself. Like you said it may be some damaged wires or a faulty sensor. But what puzzle me is upon a cold engine, the the guage would go to halfway and after I start the engine and it gets warm the guage would go to almost max, which tells me that it's reading. If I know for sure that the signal is coming from the level sensor, I would just get a new one and replace it.
Is there any particular way to test the sensor? I haven't bought the service manual yet.

[racingbmwm3]

If you can access the oil level sensor to unplug it, you need to measure the resistance between the terminals on the sensor. I don't know what the correct values are, but I know they are available via a little searching. If the sensor tests ok, then you should measure voltage at that connector with the key on to see if you are getting the proper voltage on those terminals, will tell you if there is a wiring problem. Hopefully its the sensor and not wiring.

I'm a little confused why the DME needed to be replaced, but that shouldn't be related to this issue.