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Uh... $3k for a new engine?
If you end up needing a new engine, get a used one. B230F engines generally don't go bad without neglect or abuse.
He checked the timing belt, right? To make sure it didn't jump time? That can cause a host of bad running problems, and it should be checked whenever poor performance is a consideration.
At 170k, I'd be surprised if the rings were shot. In fact, I'd be surprised if they were anywhere NEAR shot. A compression test will shed some light on that, though, and if you don't believe what you're hearing right now, just run it to another shop and ask them to run a diagnostic check on the compression, with leakdown test. You'll probably get out for an hour's labor. Maybe two if they want to do a couple more things or check it more thoroughly. Yes, it is $140 or so, but think of it this way: You will get a concrete answer as to whether or not the engine is really wheezing it's last breaths or your other mechanic is just looking to make a whole week's salary on one car. And if you find that the engine is good, you're saving thousands anyway.
Once you have answers to those questions, you can proceed with the rest of the issues. The air flow meter code and oxygen sensor code are often seen together (one trips the other, basically). Especially if there is a big intake air leak somewhere, both of them can be skewed into thinking that there is a problem. Check for vacuum leaks EVERYWHERE with a fine toothed comb. If the vacuum is bad, the car is going to run like crap. And if he based his "rings bad" comment on the vacuum being bad (when it could be leaking) you would be looking at all the wrong repairs by fixing the engine rather than what is attached TO the engine.
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1992 940 wagon, low miles
as well as others.
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