I was told this engine had a blown head gasket. The milky oil would help confirm that diagnosis, but during the teardown, I quickly spotted the source of the contamination. Upon further disassembly, I was pleasantly surprised with it's condition. Usually engines suffer apparent damage from oil starvation when water enters the oil to this level. Even the bearings look great. Unless we find cracks in the block or heads, this will be a easy rebuild. I'll measure out the bore tomorrow morning.
Heads are off:
Do you see the problem in the next two pictures?
There's a freeze plug sitting between the oil pump and the oil pan. Both block freeze plugs behind the timing cover were popped out. My theory is that the previous owner bought the car to Kansas City from Georgia (as he told me) where the coolant was replaced with either water or an unsuitable blend of water and antifreeze to keep the coolant from freezing. When it freezes, it pushes on the block freeze plugs. The ones on the outside of the block are going to be tougher to push out of the block than the ones soaked in oil because the outside ones are rusted in place. Rust inside the coolant passage ways confirms water rather than antifreeze coolant being used. The head gaskets looked fine. I hope the two popped freeze plugs were enough to save the block from the pressure of the freezing water. I won't know until it's inspected by the machine shop.
The crank and rod journals look excellent for the amount of water in the oil. They don't really show up in these pictures, but the bearings show very little evidence of scoring and none of the bearings failed.