The valves are damaged, the 3.6 V8 engine is the most reliable part of the car! Looks like you have a real engine problem, don't look anywhere else. You need a good, private Audi mechanic or/and a good second hand 3.6 engine (might be cheaper). The reason for recommending a second hand engine is becouse that is the least probable part to brake down, you'll find twice as many engines as transmissions for example. It all depends on how much you love this car. The 3.6 Audi engine is state of the art technology for 1988. Remember, Nissan got the same power out of the same displacement some 10 years after (sounds like Dumas the Father). This is a car that can be barely distinguished from an Audi 200. If you don't have the eye for it....
Cheers,
Florin