"Ran when pulled"

IMG_1554.JPG IMG_1555.JPG a few months ago, I bought a 318/904 from a guy that pulled it out of a 91 half ton. He said he hadn't done a compression test on it but it ran good when he pulled it, he was using the body for a gen 1 cummins build and had no use for the motor or tranny. I picked it up for $200 so wasn't too worried if the guy was legit or not. My plan for it was to freshen up the top end following 318willrun's low budget build and then drop it in the valiant and run it for awhile; trying to keep to the budget

I finally got some time to start tearing into it to see what I had. Nothing looking out of the ordinary other than a really sloppy timing chain; until I pulled the heads....

All of the pistons had pretty heavy carbon build up on them, but one cylinder had scale on the bottom side, almost like it had water sitting in it.

I am pretty sure I know the answer to my question, but is there anything I can do to save from doing a complete bottom end job on this motor? Any ideas what would have caused it?

Pics aren't the bestIMG_1556.JPG