for those of you following this thread jgerock is correct... this mystery came up earlier and some interesting threads that occurred can be found here:
http://www.bmw2002faq.com/component/option,com_forum/Itemid,50/page,viewtopic/p,614942/highlight,/#614942
http://www.bmw2002faq.com/component/option,com_forum/Itemid,57/page,viewtopic/t,331384/highlight,early+later+clusters/
in one of the threads the answer to my question 1 seems to be provided by Curt Ingraham:
So for question 1... according to folks on the faq BMW made an additional terminal on 04 cars to meet US seatbelt requirements but discontinued this feature the following year on 75-76 cars probably because it was such a pain. The 75-76 models still had the additional terminal on the back of the fuel/temp gauge but they just were not hooked up.
Now on to question 2... i was a little worried i may have fried this part of the circuity with that bulb with backwards polarity or something. Turns out the oil sensor went kaput seconds after installing the cluster. Double checked the connection between sensor wire to the cluster by running a ground to the sensor wire. O light came on nice and bright. Made sure the switch wasn't suffering a grounding problem by running the same ground to the switch with sensor wire back on - no o light. Time to replace the sensor.
thanks to Curt Ingrahm for helping me trouble shoot this.