1985 Ford Falcon • 205,000 miles

I have just purchased a 1985 xf ford falcon it has im told by seller a 98 xr6 engine model 90da-10039aa said he couldnt get it going so sat for a year I got it home and could not turn the crank drained oil was about 300 ml of clear water then the oil whipped the head off noticed a bit of moisture around the head and spots of white stuff not overly a lot the chambers have moisture and slight orange on the walls wipes away with a clean put some diesel down each of the 6 chambers within minutes freed up leaving a ring of rusty sludge where the rings were can have removed engine and taken sump off chamber 6 closest to firewall has orangey rust in the chamber but wipes away also no damage that I can see in the crank no rust or grime on the crank at all what do u think caused this and if so whats the next step to take
February 23, 2013.

Crank out and get it linished and get a light hone done, fit new rings and bearings new oil pump clean all oil galleries have head checked for cracks and bend, its had a blown head gasket for sure.

Feb 23, 2013.