2000 Honda Civic EX D16y8.
I bought the car from someone on craigslist with plans to repair the headgasket and daily drive it. Here are details on the car:

Before removal of the cylinder head, I hand-cranked the engine counter-clockwise to make sure that everything turns smoothly and that there are no interferences. Everything seems well so I continued on with the cylinder head removal process.
I also checked the oil dipstick and the fluid level was about 3 inches about the "full" line. I figured that with the added coolant in the oil pan that it should be like that. Of course, the oil was milky and creamy.
Continuing on, I set the engine to TDC with the crank marks aligned with the white line on the pulley and with the cam gear pointing "UP". The cam gear marks didn't seem perfectly aligned but I found it somewhat tough to perfectly align the cam gear to the plastic cover marks(couldn't position to see so aligned it at an angle) . I marked the timing belt and cam gear with white out before pulling the belt off the gear.
Finally I removed the cylinder head bolts in sequence and lifted the head off.

Check the head gasket first, I didn't see anything out of the ordinary but I'm just going to assume that it's bad. The cylinders had water and minor rust on top of the pistons. I wiped off the rust and it came off pretty easily.

SO my question is:

1. With the oil/fluid level being that high up on the dipstick, what's the possibility of extreme engine damage?

2. Also with everything set to TDC before cylinder head removal, are all the valves supposed to be closed? Cylinder #2 exhaust valves are slightly open and I'm wondering if that's normal.

3. What's a good method to clean the engine of the gunk? Oil galleys,etc.

**I'll be researching until I get responses. Thanks in advance!"

 

For #3, the preferred method would be a hydrosonic cleaning from a good machine shop. The "cheap and easy" way would be oil changes every couple hundred miles for at least 5 cycles, but the price of oil, filter, and labor would add up quickly to the cost of a single hydrosonic cleaning, and the cleaning would be a guaranteed clean, whereas the oil changes wouldn't be.

 

all the valves are not supposed to be closed, when you turn the motor to cyl 1 tdc, the cam is still opening the valves for the strokes

 

Okay so UPDATE! Started the car after hand cranking the engine 5+ times to make sure there are no interferences. The car starts, runs, and is drivable but there are 4 CEL codes for misfiring. At first, the car idled and ran pretty bad. After adding in about 8 gallons of 93 octane fuel the car ran better. Idle is steady and acceleration is decent. The CEL disappears until I give it moderate throttle..then it starts flashing again. That's when I back off the throttle. I'm thinking that it's a fuel problem..something is clogged maybe. Here's a list of what I did so far:

-Ran Seafoam (2/3 bottle through gas tank. 1/3 through brake booster hose)
-Replaced fuel filter
-2nd oil change to clean out engine

What could it be??
The car runs okay under slight throttle/acceleration. It tends to lag starting from a dead stop. I'm stumped!
CEL code 71-74

EDIT: I also removed the primary O2 sensor and it was pretty white. Not good!!