Alrighty, I spent 45 minutes opening up the motor. Having a crank-locking tool really makes that 22mm crank damper bolt a piece of cake! So, what did I find? Was it the guide rail, like I had guessed?
Does anything look funny from this angle?

If nothing stood out, then how about from this angle?

Yeah, you may be noticing something above. Well, yeah here it is. Someone make a rage/FFFFFFFFUUUUUUUUU image macro for me, quick!

There was a pile of aluminum shavings up on the top of the lower cover, above the water pump. I guess the chain was milling away on something.

If you were wondering WHAT it was milling away on, then here is your answer!

So, here is where I am at. I am NOT repairing the motor. This is the second busted timing case, and the third mechanical failure in that general region. The motor has 220,200 miles on it, the previous owner (I got this in 2005 with 140,000 miles) mistreated it & wasn't great on maintenance, and I have been driving the dog shit out of the motor ever since then. It is well known that the thrust bearing on the crank is a weak spot, and I have no idea what condition that is in at this point, and I feel that it is at the end of its useful life without a full rebuild. The chassis is mostly free of issues, aside from some niggling cosmetic ones, so a new motor could get me another decade of use.
Although I have been super indecisive about what to do, I decided that I don't want to be a goober & drive a shiny new car around because that just isn't me. While I would gain some comfort from a new, reliable cookie-cutter vehicle, I just can't do it. Especially in this area, just about every 20-something with a tech job is cruising around in a sporty new car. While I am also a 20-something with a tech job, I prefer to keep a lower profile & maintain my grease-monkey status.
So, I am going to work with Metric Mechanic on something. My dream, for YEARS, has been a Rally 2100 motor with all of the options. It is a silly amount of money, but it is less than a new car, and I would have to hope that those motors are absolutely bomb-proof. Given that the rest of the chassis seems to be in good condition, a new motor could mean another decade of relatively pleasant ownership. How many folks here have MM motors, and what are your impressions of their reliability? It seems like durability & quality are their main focus, and everyone seems to regard them well. If I was to drop a silly amount of cash on a MM motor, I'd have to KNOW that I wouldn't need to do more than change the oil & maybe a hose or two for the next 100,000 miles. Sheer power is not my concern, and I am not considering motor swaps. 205HP in a 318iS chassis strikes me as the perfect amount of power. Being that I almost killed myself driving like an idiot back in 2005, I am over the idea of having "lots" of power. All that would get me is trouble! I also don't really participate in track events, but I would like to get back into autoX.
How about SMOG compliance? Going to 11 or 11.5:1 compression with an MM motor will increase the NOx emissions. By how much, I can't say. A fresh catalytic converter usually has me passing SMOG with damn near zero emissions (with a new cat, I was puffing out less emissions than my fiancee's 2003 Civic). I can't afford to get a fancy motor & then NOT pass CA SMOG lol.
Anyway, my fiancee is actually sort of supportive of me getting a built motor since it will make me happy. I haven't told her that a Rally 2100 w/ options will be $10k, and that I just might throw in a MM rebuilt transmission since I know that the input shaft on mine is dying anyway. Still, if I can get new-car reliability in my lovable old-car, I am OK with it. I am a frugal guy, and I live well beneath my means the majority of the time. I am a big saver. In truth, the whole reason I save is so that I am prepared for any times in life where I have trouble & need to be able to deal with it without doing any "creative financing" (loan sharks, borrowing from family, etc). Well, this is one of those times, so I am strongly considering going for an option that I have been wanting for a LONG time.
I am sort of hesitant to drive a car around with a motor that expensive. I would absolutely work out an insurance plan that covers every penny of added value since it could get crashed, or some asshole could steal & gut the car. While that is unlikely, you just never know. Where that person would sell the motor without someone noticing is another story, especially since I would have serial numbers engraved in all sorts of spots, but I want to be covered anyway.
I'll keep you guys posted on what happens. It is looking like I am not bailing on the E30 lifestyle though!
EDIT
The car gave me a clear sign that this motor was not to be repaired. I got a death cry from it. About 6 miles from home with the loose timing chain, the f***ing horn button on the steering wheel started sticking (needless to say, I was irate). So here I am driving down the highway, clattering & randomly honking like an imbecile. The car was giving me a message. "Get a new motor. Oh, and fix my left-side horn button kthx."