Re: 1981 35 horse Johnson worth rebuilding?
I suspect since one of the water jacket diverting thingys is melted out or missing, that your used block had gotten hot at one time. If there are any grooves or scratches in the cylinder walls, it'll probably need boring, which will require oversize pistons and rings (probably $250 in parts just for that), plus other stuff. I'll bet you wind up with $750 in the block after machining, parts, etc. Then you'd have a like-new powerhead on an old lower unit. I'd still keep looking for a good used block that has good compression. A used motor in good shape could probably be found cheaper than you can rebuild yours the right way.
If you wanted to get by cheap, you might hone your block if it looks o.k., find a new used piston, rod, and crank assembly (I've bought 'em before on ebay cheap), and use new rings. No telling how long it would last, according to the clearances and if the bores are out of round. Don't forget to check the head for warpage.
Good luck either way. You'd have to count the fun factor of rebuilding it yourself for at least a couple of hundred.

j
JBJ