John, thanks for the reply. I had the time today to go out and check this problem out some more per your suggestion.

I measured the oil pressure and found it to run 35 - 55 psig (1000 - 2500 rpm on warm engine). This seems ok (?).

Now, checked the compression. Cylinder #4 = 200 psig, #3 = 185 psig. NO pressure developed on cylinders #1 and #2 (I couldn't believe this, but used my finger to confirm!).

A photo of the spark plugs can be seen here: http://tinyurl.com/az2z6kp

A video clip of the sick sound is here:
http://www.youtube.com/watch?v=XXWF1OArX1Y&feature=youtu.be

I'm just a shade tree mechanic. I did do the swap of this engine into my '92 940 but I've never tackled a rebuild. The engine had good power and ran well before I transplanted it (from a '93 240DL) 30k miles ago.

So with this added data, I would be interested in what thoughts you (or others) might have about what has happened to my engine.

Thanks again and Happy New Year.
-Phil Smith