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[T3] Help! '68 Sqback Timing Problem (long)

Let me start by saying I'm new to T3s but not to aircooled VWs.  
When I first got the squareback I posted my problem involving a 
lack of power until the engine got up to (I'm guessing) 3000 rpm.  
Yesterday the problem got far worse so I figured it was time for a 
good look and a tune up.  I went out this morning with the intention 
of setting the valves and doing a tune up.  I got out the Bentley and 
the Idiot Book.  I found that the engine has a number of odd things 
about it.  The numbers on the engine indicate that it is the original.  
The distributor is the correct one for this engine.  Those two things 
are not odd but -

When I turn the pulley to get the engine to the point where #1 fires 
the marks don't line up.

The pulley has 4 marks, three close together and one to the left of 
them, like this   |  | | | 

Using a static timing light - the engine is timed at the far left mark 
but the rotor on the distributor is one plug wire to the right of the 
mark on the rim of the distributor.

Finally,  the mark on the distributor rim is roughly at the 10 O'Clock 
position.  This looks correct compared to the Idiot Book.  However, 
the plug wire above that mark is #4.  Moving clockwise the next is 
#3, then #2, then #1.  So it looks to me as if the engine is timed for 
#3 instead of #1.  

I thought about rearranging the plug wires and setting the timing for 
#1 but the distributor won't rotate far enough to have the pulley and 
the rotor line up correctly.  The vacuum can gets in the way.

I changed the plugs, points, cap, rotor, and plug wires but it runs 
just as bad as it did yesterday.  Anyone got any ideas?  I need to 
get it running at least well enough to drive to work on Monday.

Martin Garramone
Austin, Texas
1968 Squareback
1968 Westfalia

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