Since this topic pops up now and again here is what the EPA said about it.

Pursuant to frequent requests for information received by the U.S.
Environmental Protection Agency (EPA) regarding the legality and effects
of engine switching, this document will summarize federal law and policy
pertaining to this matter, and will discuss other related issues.

A. Federal Law

The federal tampering prohibition is contained in section 203(a)(3) of
the Clean Air Act (Act), 42 U.S.C. 7522(a)(3). Section 203(a)(3)(A) of
the Act prohibits any person from removing or rendering inoperative any
emission control device or element of design installed on or in a motor
vehicle or motor vehicle engine prior to its sale and delivery to an
ultimate purchaser and prohibits any person from knowingly removing or
rendering inoperative any such device or element of design after such
sale and delivery, and the causing thereof. The maximum civil penalty
for a violation of this section by a manufacturer or dealer is $25,000;
for any other person, $2,500.
Section 203(a)(3)(B) of the Act prohibits any person from manufacturing
or selling, or offering to sell, or installing, any part or component
intended for use with, or as part of, any motor vehicle or motor vehicle
engine where a principal effect of the part or component is to bypass,
defeat, or render inoperative any device or element of design installed
on or in a motor vehicle or motor vehicle engine, and where the person
knows or should know that such part or component is being offered for
sale or is being installed for such use. The maximum civil penalty for a
violation of this section is $2,500.

EPA received many questions regarding the application of this law to a
situation where one engine is removed from a vehicle and another engine
is installed in its place.

EPA's policy regarding "engine switching" is covered under the
provisions of Mobile Source Enforcement Memorandum No. lA
(Attachment 1). This policy states that EPA will not consider any
modification to a "certified configuration" to be a violation of federal
law if there is a reasonable basis for knowing that emissions
are not adversely affected. In many cases, proper emission testing
according to the Federal Test Procedure would be necessary to make this
determination.

A "certified configuration" is an engine or engine chassis design which
has been "certified" (approved) by EPA prior to the production of
vehicles with that design. Generally, the manufacturer submits an
application for certification of the designs of each engine or vehicle
it proposes to manufacture prior to production. The application includes
design requirements for all emission related parts, engine calibrations,
and other design parameters for each different type of engine (in
heavy-duty vehicles), or engine chassis combination (in light-duty
vehicles). EPA then "certifies" each acceptable design for use, in
vehicles of the upcoming model year.

For light-duty vehicles, installation of a light-duty engine into a
different light-duty vehicle by any person would be considered tampering
unless the resulting vehicle is identical (with regard to all emission
related parts, engine design parameters, and engine calibrations) to a
certified configuration of the same or newer model year as the vehicle
chassis, or if there is a reasonable basis for knowing that emissions
are not adversely affected as described in Memo 1A. The appropriate
source for technical information regarding the certified configuration
of a vehicle of a particular model year is the vehicle manufacturer.

For heavy-duty vehicles, the resulting vehicle must contain a heavy-duty
engine which is identical to a certified configuration of a heavy-duty
engine of the same model year or newer as the year of the installed
engine. Under no circumstances, however, may a heavy-duty engine ever be
installed in a light-duty vehicle.

The most common engine replacement involves replacing a gasoline engine
in a light-duty vehicle with another gasoline engine. Another type of
engine switching which commonly occurs, however, involves diesel powered
vehicles where the diesel engine is removed and replaced with a gasoline
engine.
Applying the above policy, such a replacement is legal only if the
resulting engine-chassis configuration is equivalent to a certified
configuration of the same model year or newer as the chassis. If the
vehicle chassis in question has been certified with gasoline, as well as
diesel engines(as is common), such a conversion could be done legally.

Another situation recently brought to EPA's attention involves the
offering for sale of used foreign-built engines. These engines are often
not covered by a certified configuration for any vehicle sold in this
country. In such a case, there is no way to install such an engine
legally. EPA has recently brought enforcement actions against certain
parties who have violated the tampering prohibition by performing
illegal engine switches.

It should be noted that while EPA's policy allows engine switches as
long as the resulting vehicle matches exactly to any certified
configuration of the same or newer model year as the chassis, there are
some substantial practical limitations to performing such a replacement.

Vehicle chassis and engine designs of one vehicle manufacturer are very
distinct from those of another, such that it is generally not possible
to put an engine into a chassis of a different manufacturer and have it
match up to a certified configuration. Therefore, practical
considerations will generally limit engine switches to installation of
another engine which was certified to be used in that same make and
model (or a "twin" of that make and model, e.g., Pontiac Grand Am and
Oldsmobile Calais). In addition, converting a vehicle into a different
certified configuration is likely to be very difficult, and the cost may
prove prohibitive.

B. State Laws

Many states also have statutes or regulations prohibiting tampering in
general. Most of these laws specifically prohibit tampering by
individuals. A few specifically prohibit engine switching, using
provisions similar to those stated in EPA's policy. To determine the
state law in any given state, the state's Attorney General's office
should be contacted. In addition, many states have state or local
antitampering inspection programs which require a periodic inspection of
vehicles in that area, to determine the integrity of emission control
systems. Many programs have established policies for vehicles which have
been engine switched. While EPA does not require these programs to fail
engine switched vehicles which are not in compliance with federal
policy, the Agency does strongly recommend that these programs set their
requirements so as to be consistent with the federal law. State or local
programs which pass illegally engine switched vehicles may mislead
federally regulated parties into believing that engine switching is
allowed by federal law.