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Cracked block, as that much rust indicates that it has been an issue for a while. I would try to source a new block.
You could take a bead blaster hone and try to clean it up a wee bit...to verify what may have happened.
 

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Allen, you need to get this thing cleaned down to the metal to see if the cylinder is cracked, or if it was just run a long time with a bad gasket. Or did it stop running, the engine pulled and replaced, or just parked for years and now you bought it. It may or may not be reuseable. But if history on these things means anything then you are looking at a blown head gasket fix. Too bad that wasn't done long ago. Maybe the only reason you now have to deal with it.

First you need to get it clean enough to see lines where coolant might have come in from the sides of the cylinder. Not just grooves from the piston rings, actual cracks through to the water jacket.

Used blocks are fairly easy to come by on Craigs list, at least around the PNW it seems. Is this a 1.5 or 1.6 liter engine?
 

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Discussion Starter #4
Thanks for answering me back. It is a 1.6l. I had the compression checked a time back and it showed around 230 to 300. The engine has not run in a long time. I was thinging about taking the block to a engine shop and get them to run a test for cracks.
 

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230-300 is way low as IIRC it should be up near 400 on the low end.
What does the under side of the head look like ie: valve edges and such...
 

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Discussion Starter #6
Around the valves on number 3 had little rust and the rest were clean. The
cylinder hole on number 3 had rust that was caked up around the top but was clean down inside.
 

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Yeah, if you aren't in the 400's with compression numbers you are out of the game with that cylinder. Look at the rings and see it they were worn or what they call Coked UP. And that is not something from the red can either. But dropping them in that stuff might be the ticket to getting the stuff off of them. There are wear tolerances for rings too. Once they get so thin they just don't scrape and ride the cylinder wall well anymore.

Take it to a shop and they will be able to look for scoring in the cylinder, measure the diameter in a couple or three directions. That will tell you if it is sort of egg shaped from wear. Then they can check for a cracked cylinder as well. It shouldn't cost a bundle to have all that done. Then you can ask if they can do the work to oversized the pistons and maybe even assemble that all up for you.
 
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