I picked up the rebuilt longblock from Mauricio Velasquez, who sourced the machine work and did the final assembly. Mauricio runs Jomag, an aircooled VW shop in the Silver Lake district of Los Angeles. Back in the day he had a nice moss green Cal-Look Notchback that got covered in the VW press and placed in the local shows, so he's fluent in Type 3. If you live on the eastside of L.A. and need a fair and honest mechanic for your aircooled or watercooled VW, give Mauricio a call.
In the end it turned out there was no obvious cause for the sudden compression loss, just wear and tear and probably a case stud or two that let go just enough to cause trouble. Just about everything was salvageable. The case was align-bored and case savers were installed. It turned out to be a routine overhaul.
The original '62 311101301A cylinders were put back into service. My original plan had been to move up to 85.5mm pistons and cylinders because I assumed the old ones would be too far gone, but it turned out that they were within the wear limits, so I decided to reuse them since they've always been with the car. There must be only a handful of cars out there that are still running on these early cylinders. One piston ended up having a hairline crack and had to be replaced, but luckily I was able to find an NOS 83mm 1500 Kolbenschmidt piston in the Samba classifieds from seller Bob Sepulveda.
I was worried that the heads might be cracked, but they came back from the machine shop with a clean bill of health and looking new. What a relief. We were even able to keep the long rocker studs. You really know you've got a 1500 when you set the valves at .008".
Now the final reassembly can begin.