Our shop has an '88 Bronco II, 2.9 that is indicating internal leakage into the cooling system. Generally, is this a head gasket issue, or worse? Thanks in advance.

 

Usually worse...2.9's are notorious for cracking heads. Check out this article:

2.9 Ranger Head Replacement .: Articles

Hard to see the cracks in those pics, but where they usually crack is around the base of the valve spring on the end cylinders, you may be able to see cracks by removing the valve covers and cleaning the area with carb or brake cleaner. This is (as I understand it) the most common place and usually results in water in the oil but not hydrocarbon in the cooling system (which is what I presume you've diagnosed, from your description) but is not the only place they crack. Of course, head removal is indicated either way.

 

Once the heads crack that about it.

World Products makes a replacement 2.9 head that is stronger and will not crack. They cost about $150-200 a piece, and use your existing intake, valves, springs, etc..

 

My 1st 2.9 got water in the oil....in the pan and oil filter. I tried to just change the oil and filter....still had peanut butter in the new oil...Had to have it towed home. This was at 300,000 miles....what a great motor it was.
Bought my current 2.9 motor used. It starter running poorly, so I had to learn how to test all my sensors and California emissions....The fix was a new distributor and TFI module.
Then it started to blow comperssion into my Radiator overflow reservoir. Only had peanut butter in upper part of valve covers and oil cap. Tried to use K&W Block seal...no change, used block seal with metal flakes in it....these only plugged up my heater and radiator cores. multiple oil changes ( have always used Castrol and Mobil 1 filters..and Duralube every other oil change). I finally used a product called Blue Devil .....It was amazing!!
It has worked for over 2 years, but now I have finally started to replace gaskets. I checked to compression wet and dry. All cylinder were within range dry (168-170) except #3 was 158. All cylinder were 180 wet. So I'm only going down to the lower intake gasket. I found three areas where water was escaping, and the engine had lots of thick,tar consistency on the gasket itself. Both valve covers had peanut butter caked to their tops. On further inspection I didn't find any cracks in the heads. So I'm just cleaning all the sludge and carbon build up, repainted the valve covers, and hopefully remove the oil pan and pump to clean them out.
According to my Haynes and Chilton manuals...Remove distributor, starter, motor mounts..all done. I can't budge the exhaust bolts due to too much rust (tried PB Blaster, 50/50 transmission fluid and acetone, and heated the bolts red hot then cooled with Ice). So I still need to remove the front stabilizer and unbolt the cross member, then I can jack up the motor to be able to remove the oil pan.
Now a question: Can I jack up the motor without disconnecting the exhaust? I only need to lift it 1 1/2 inches. I guess I'll find out in the morning....I hate to have cleaned out all the sludge from the top of the engine with out cleaning out the pan and possibly put in a new oil pump (or clean up the pump). Pray for good results...
I hope this account saves someone from having to replace heads or head gaskets.