Head rebuild and new rod bearings.

With confirmation of the blown head-gasket and the likelihood that the head is warped means that it has to be removed. Given the audible rod-knock and the oil leak at the rear main seal it appears the easiest solution is to remove the entire engine to fix everything at once.

This leaves two options, rebuild or replace with used. After checking a number of sources, I wasn't comfortable that any of the used engines currently available were going to be any better than a partial rebuild.

After discussing my options with a number of reputable engine builders, I think I'm going to completely rebuild the head to OE spec, replace the rod bearings with the pistons and crank still in the block. A full rebuild is tempting, but the additional cost of machining the block and rings/bearings is prohibitive ($2k). Most builders think the mains are bulletproof and BMW rings should be good but will need a good look while things are apart.

Some early decisions include using ARP head bolts and rod bolts, installing a VAC Oil Pan Baffle, and upgrading the valve keepers.