Phase 2 engine into Phase I V70R AWD
 

I’m trying to restore my Phase 2, with a good low mileage engine. It’s almost worth getting a donor vehicle for all the parts I need.

What I need to know is whether a 265 hp engine will fit straight into the earlier 97-98 cars? I doubt it, but it would be nice if it was a possibility?

Realistically, you're probably better off buying a P1 in good nick.

However, if you're really determined. In theory, yes it should be possible. Your major hangup will be the electronics as there are a few differences, such as (but not limited to).
P2 engines have coil-on-plug spark, whereas P1 had a coil pack with HT leads. I have seen posts of people doing coil-on-plug upgrades to the P1's though so this should be ok.

The electronic throttle had a revamp between the generations (with I believe different sensors)

The ECU's on these cars are not interchangeable without software being reloaded (not to mention that a P1 ECU probably won't talk to the P2 electronics at all.) You may get away with a custom map on a P1 ECU.

Mechanically though, the whiteblock engines are (mostly) the same, so it should bolt right in.

I may have missed something minor, or an entirely blocking factor so if anyone else has any more knowledge on this please let post!

I have now bought a donor car, exceptional bodywork but overfuelling, remapped 2.3 engine. I’ll see if the engine is worth doing or swap the good 2.4 engine in. But it if I do that, I will be breaking the 99V car.