Ouch...
A rebuild is probably out of the question, though it has been done.
Depending on where you are located, a PNP engine may or may not be feasible. It's certainly possible to get a good engine that way, but you run the risk of getting an engine not a lot different than the one you've got.
The best course of action would probably be to get a running car with an engine you can hear run and evaluate.
In my own situation I got a running, but thrashed 300D for $700 which provided the donor engine/transmission for my SL swap. It's got nearly 100k on it since the swap so it was a good one. On the other hand I got what was supposed to be a good "spare" engine and transmission from a PNP and even though it ran, closer inspection showed the head was cracked and the pistons were trashed from melted prechamber balls. The good news is I only paid $400 for the thing and used the transmission when the original one failed.
There's no one good answer but there are options.
Here's a quick sample of what you might find for well under a grand based on a 30 second search in my area -
http://sandiego.craigslist.org/nsd/cto/5382333622.html