Hi Chuck. You are on target with with valve guides & seals. I've owned two BMW's, a 2000cc 4 cylinder 1972 2002 Tii with the Kugelfisher Mechanicak Fuel Injection and a highly modified 1979 3.2L 6 cylinder 633CSI.
The Bimmer in-line 4 & 6 cylinder engines love to rev and they do it well for a long time. But when the engine starts getting higher milage the clearance opens up in the valve guides. When you go against compression it suckes oil in thru the guides pretty good and it smokes like hell.
My 633CSI had the smog gear removed, the head had been milled & ported, a radical cam and a two piece headder system and custom exhaust. I put over 90K miles on it and it still screamed but it started smoking a little when it went against compression. And if I was on a real high speed pass, say 125, and then back off the gass you would have thought the engine exploded from all the smoke.
Good luck with the 2002 they are great little cars. I wish I had kept both of my BMW's, the 2002 Tii was suprising and driving that 633 was the most fun I could have with my pants on!!
