I hate to back up here but I'm thinking if it's possible that the sludge in the ext tank is from the radiator and that maybe this whole thing is only circulating from the radiator through the cooling system. I really can't tell if the sludge is oil or gunk but it's greenish black. If the engine was burning oil to produce the gunk in the ext tank wouldn't there be some evidence on the dipstick, which shows relatively clean oil without any burn residue? My mechanic seemed to want to jump right in on the valve job, citing the number of miles as the reason, even though the car probably consumed 1/2 quart of oil over 3000 miles intervals. Maybe the coolant flush of the green coolant a few months back missed some residue. Thanks again for the responses. I've talked to two different shops over the phone and they're both ready to go treasure hunting, it seems to me.

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W124 The Ultimate Taxi