I have to imagine Topless may be right, too, with #3. You mentioned smoke when you got out of the car. Was it coming out of the tailpipe or out from under the car?
If the head/block overheated, you can be pretty sure something cracked and introduced coolant and/or oil to places they aren't meant to go. I'm still wondering if the water pump impeller is what did this in, or maybe it along with a combination of other factors like faulty fans? Have you changed the water pump recently/ever?
I have to agree with others on finding another mechanic for your Boxster. I understand if you've known the guy a long time, but that unfortunately does not grant him expertise in M96 engines, or anything Porsche for that matter. Aside from the (non-flashing) CEL, I don't think there's really any light anyone should ignore, nor be told to ignore. There has to be a fairly local specialist for you to go to. Mine is nearly $40/hr less than the dealer and only 10-15 minutes farther away, and while he's still not cheap when you get right down to it, all he does is Porsche, for nearly 30 years now.
Any chance your employer has a corporate discount with Enterprise or another rental company?
Really sorry to hear about this, but I hope it's not as bad as we're all thinking. Keep us posted.
EDIT: Well I'm seeing there's been plenty of updating going on as I've been typing. Maybe I'll go back later and delete the irrelevant stuff.
Well crap, that sucks, though I'd be looking for 2nd opinions from someone who knows these cars. The maybes and the possiblies don't really work, in my opinion. What failed, and what broke as a result? That's what I'd want to know, definitively. See if there's anyone near you.
Why not see if you can find a 3.2 or 3.4 to drop in there? Great excuse at this point.
I'd hate to see it get parted out, but if that happens I'm sure we can help you accomplish that, and maybe you'll be able to nab yourself an early 986 S to keep right on going.