Aye, Snow...have to agree with the general consensus on this one as well...while I have only swapped my buddies S3 a few times (99), it was tight as a swiss watch, smoother then my Dyna, and didn't smoke any more then any others in our groups. I think there may be some mechanical issues with that particular one.
Sides...any bike that has "lost compression" is having a major bad hair day...even re-ringing/honing, when done properly does not cause a noticable compression loss...fact my wife's 83 Yammy 750 gained about 4 pounds when I re-built it, mostly do the huge amount of wear it had sustained in 51k...(she rides more then me, it's SO embarrassing...)
in general loss of compression post-rebuild is caused by some type of damage, or poor re-building - ie. over honing/poor piston/ring choices for seating etc...damage could include - Cyl Head pitting (from foreign object or just from burndown it caused) valve seat or valve damage from same...ack the list goes on...generally if it sounds/runs wrong - it IS wrong...and the S3 is considered (by our group at least) to be the most bulletproof of the line...
At the very least I would ask if you could have it checked out by an experienced mechanic (third party).
hope this helps