Alright, I am going to give this a couple of days of thought. I can't pull the motor to ship it back any sooner than Saturday, so I have no choice but to wait anyway!
The issue is a partially seized exhaust valve, at least as far as I can tell. A mirror and flashlight seem to show that the rear exhaust valve for cylinder 2 isn't closing fully. It is so oily & dirty in there that it is hard to tell. Once I pull the motor it will be easier to tell what is actually going on. At this point both MM and I are in disbelief that this could happen and they are committed to doing right by me. If this somehow were to end up being my fault, then god help me lol. I certainly do not recall dropping any screwdrivers in there!
I have a really great group of friends, family and a very understanding fiancee. So, I think that I can keep the E30 without completely pissing off everyone that I care about. I will be talking with MM about a repair, and I hope to hell that I get many years of irresponsible driving fun out of this car thereafter. I assume it will take a month with cross-country shipping 2 ways and all, but I don't really need a car on a daily basis, and I have been 4 months without so what's one more?
So, wish me luck! I may have overreacted a bit initially...the disappointment was crushing given that I have dreamed about this motor for 6 years. I am sure that it will be fine, MM is THE name in performance BMW engines and I am willing to trust them with this.
Thanks for the support guys!