Snot good.
Pulled head and was greeted with this in the 3rd cylinder:

Head:

We really should have pulled the spark plugs and looked inside before buying. Oh well, now we know to do that in the future and I only gave $70 for it.
So, at this point we thought we better have a look at the underside. Upon draining the oil pan, got a lot of water. Gets better and better.
Wasn't as bad as I feared but still not great. Yanked one crank block and one rod block, pretty heavy grooves but they don't seem burnt:

However, the cam has bluing:

The rods have a lot of rust:

Is this worth trying to save? we think it's probably a lost cause. Thinking either the head or the block is cracked. The gasket looked ok.
I think it will be useful as a donor. Should I go ahead and tear it all the way down and magnaflux the crank, block, and head?
If the cam is blue that means it is scrap, right?