my brother's '96 civic is having engine knocking problems. we took off the head and there seems to be no evidence of the cylinder hitting the valves. however, cylinder #3 was slightly discolored (rainbow type color, makes me think its getting really hot). we took out the timing gun to time it properly, and the light was jumping around. it would blink in rhythm then it would add blinks to make it almost random blinking. would this have to do with the knocking? should i replace his cap and rotor? any other advice?

Do you think it's rod knock, my friends Civic threw a rod last weekend and I heard it's common on the D16, also is the idle jumping that's what this Civic did?

no, i dont think his idle is jumping. he thinks its a rod knock, but hes not sure.

Tell him to tach it up to about 1500 or 2000 and if it hits really loud it's the rod, if it's soft and more of a ping it's piston slap. It's possible the heat warped the rod and is causing slap.

when we rev it up in neutral, it is a really loud knock. i guess some extreme heat (discoloring on cylinder head) did warp the rod. he is selling his car within the next few weeks, which is why he wanted to get rid of the knocking, but looks like it wont be worth fixing anymore.

Sounds like you need to tear it apart. D16's are cheap it would probably be better to get one from a junk yard.