I recently got a great deal on a 1989 305 TPI Firebird Formula. The car has motor issues, I was told it had a pretty bad knock. I checked out the car and it has a bad rattle, it sounded like a rocker arm or two was nearly off. when I removed the valve covers the motor sprays exhaust gas out of the lifter valley. I'm thinking it's either a dropped valve that's poked a hole in a piston, or the cat is so clogged it's forcing the exhaust past the rings. The car holds oil pressure and will run and rev but it's got bad issues. I really don't want to pull the heads only to find the motor's scrap; I would rather just replace it. Is there any possibility it's not a dropped valve?

 

A cylinder leak down test should be all you need to do to diagnose your engine. To make it even easier, do a compression test and only do a leak down on the lowest cylinder(s). If the air you blow into the cylinder (with the valves closed) blows back in your face from the crankcase you probably have a burned or broken piston. If a valve is broken, the air will go out the intake or the exhast. Or, a combination of all three.

 

Don't think it's a dropped valve. Engines with a dropped valve usually won't start or if they do, they barely run with constant backfiring thru the intake.
Stopped up cat will not cause blowby. Symptom is always low power.
The key is the blowby. If it is coming out in puffs or if it's a steady stream.
If it puffs, it's possible it is a blown headgasket but more likely a burned piston. Compression & leakdown tests will locate this if it's just one cylinder.
If it is a steady stream, the engine is most likely worn out (rings).