OK, this is what happened. Thought I should let everyone know what my experience was.
The dealer just changed the O2 sensor - strangely, the cold running problem has nearly vanished! I was also not expecting it to work this well. Went for the e-check - passed easily:
HC: 22.3 ppm (allowable 189, previously 142)
CO: 0.13% (allowable 1.21%, previously 4.48%!)
So the O2 sensor is working properly. The mixture was probably very rich, so lots of unburnt fuel and gasses were going thru. I didn't do any of the recommended things before e-check, except driving it for 20 minutes on the freeway before the check - wanted to see what ACTUALLY my emissions were.
Fuel consumption has also gone down to previous levels - I used to get 22-23 mpg city driving, which had gone to 19-20 mpg with the cold running problem. Now its back to about 23 mpg (city).
Also, the dealer refunded me one hours labor when I pointed out that they had not replaced the lamda tower - the technician thought it was not necessary, though the service advisor had put that in. So the 1.5 hours labor for the O2 sensor was actually 0.5 hours for the sensor, and 1 hour for the lamda tower. I must add that the service advisor at the dealer was not that honest about it initially - even when I raised this issue, he tried to convince me that it was 1.5 hours for the O2 sensor alone (had quite a gall to keep a straight face for this one!), but when I showed him the writings from the tech, fortunately the tech has broken down the estimate, so the service advisor had to give it. All in all, I was charged 2 hours of labor including diagnostics, which is not that bad.
Well, its been only 3 days, so I hope the improvement in my car is here to stay. And again, thanks everyone for contributing your valuable thoughts.