In 1986 BMW chose the S38 designation for the catalyst version of the famous M88/3 engine. The code S38 designates: (1) 'S' means that the engine is originated by BMW Motorsport, (2) the '3' means that it is derived from the M30 engine family, and (3) the '8' is chosen to make a reference to the legendary M88 motor. Three different versions of the S38 were made by BMW M, and the most powerful 3.8 liter engine was never officially exported to the USA.

3.5 liter Engine

To meet the US exhaust emission regulations of the time, the catalyst equipped S38B35 replaced the M88/3. The S38B35 kept the M88/3's bore, stroke and cylinder head, but the compression ratio decreased from 10.5:1 to 9.8:1 to install a catalytic converter. The equally tuned exhaust headers of the M88/3 were replaced by log headers. These changes had the effect of decreasing engine performance. The S38B35 delivered 260 hp and a torque of 330 nm (243 lb/ft) at 4500 rpm. Due to additional factory options, the US E28 M5 and E24 M6 were noticeably heavier than the European cars, and it had an impact on performance. The European E28 M5 can do the 0-100 km/h (0-62 mph) sprint in just 6.5 sec, while the US version needs 0.3 sec more.

In the US and Japanese markets, the M635CSi was renamed the M6, while Europe kept the M635CSi designation. The distinguishing mark between the M6 and M635CSi is the engine, for the M6 always contains the S38B35 engine, while the M635CSi can have either the S38B35 engine or the M88/3. Most of the E28 M5 and E24 M635CSi models in Europe were equipped with the M88/3 engine, without the catalyst.

The production of the BMW E28 5 Series ceased at the end of 1987, succeeded by the BMW E34. Soon after the introduction of the E34, a Motorsport version became available, the E34 M5. The engine that powered the E34 M5 is a further evolution of the S38B35 engine which powered the catalyst versions of both the E28 M5 and E24 M635CSi.

The E24 M635CSi remained in production until the Spring of 1989. During that time, the M88/3 and S38B35 engines were produced by BMW Motorsport alongside the S38B36. This benefited the last E24 M635CSI's because in their final production months, both the M88/3 and S38B35 engines received the duplex timing chain of the S38B36.

3.6 liter Engine

To create the S38B36, the S38B35 engine was stroked from 84.0 mm to 86.0 mm, the same as the M30B35. This increased the displacement to 3535 cc. The bore remained 93.4 mm. The compression ratio was also increased, from 9.8:1 to 10.0:1. The S38B36 delivered 315 hp @ 6900 rpm and 360 nm (269 lb/ft) at 4750 rpm.

The intake received an electronically controlled RAM induction system to increase torque. A changeover valve was added to vary the effective length of the induction system depending on load and engine speed. The changeover valve operates when the engine speed is below 4120 rpm and full throttle or the engine speed is above 6720 rpm and full throttle. The engine management system remained the Bosch Motronic, but instead of measuring the airflow with a valve, the S38B36 received an airflow measurement system based on a hot-wire sensor.

To meet emission requirements, a ceramic catalytic converter was added to the exhaust system. An air injection feature for the exhaust was added to control the emissions at cold-engine start up. Air is injected into the exhaust system to convert carbon monoxide into carbon dioxide, and hydrogen into water. Tropical regions like the Middle East and Southeast Asia got a slightly different version of the S38B36 with the compression ratio reduced to 9.2:1.

3.8 liter Engine

In 1991, BMW Motorsport redesigned the S38 to improve performance. The bore and stroke were increased again, and the displacement grew to 3795cc. The compression ratio was increased to 10.5:1. The intake and exhaust ports increased in size also, and each spark plug got it's own high-voltage coil, eliminating the distributor rotor and the high-voltage wiring. A smaller and lighter Emitec metallic catalytic converter replaced the ceramic catalytic converter. The main advantage of the Emitec metallic converter is that it increases the flow of the exhaust gasses. The Bosch Motronic 1.2 fuel management system was replaced with the Motronic 3.3 system. The new system includes a resonance flap control. This feature is the same as that used on the S38B36, but with an extra switch-point at 2480 rpm.

The S38B38 was the last evolution within the S38 engine family. It delivered 347 hp @ 6900 rpm and 409 nm torque at 4750 rpm. These changes stretched the S38 to its limits (the 5.4 mm web spacing between two cylinders is very narrow. This is 0.6 mm less than the M49/3 racing engine.)

The S38B38 engine remained in production until the summer of 1995 when the last of the E34 M5's left the production facility in Garching, Germany.

For the Swiss and Austrian markets, the S38B38's were fitted with ceramic catalytic converters and smaller exhaust manifolds (80mm vs. 90mm) from the S38B36 engine. As a result, the Austrian and Swiss versions of the engine delivered 327 hp, not 347hp.