Thanks for the info and advice everyone. The rear wheel is definitely trashed, it does spin but i can feel the bearing grinding around. Also the freewheel is rusted and doesn't spin. I tried installing a newer 700c wheel that I have on it but I need a slightly bigger spacing on the frame. The wheel is an alexrims R500 with a 7 speed cassette, so it would be nice if it fit because that's how many speeds this bike is supposed to have (Ricohman: you are right about it being an '89). I'll just have to track down a nice 27" wheel. I wouldn't consider respacing the frame; that would be sacrilege. The frame I wanted to build up before I got the Trek was a beautiful Lotus Excelle frame that I found out was ruined by someone trying to make it in to a single speed. They ruined the stays trying to respace it.
Dit: Yes it is the right size and I plan on keeping it and I will treat it very well. AND I'm going to get a bomb-proof lock for it for the times where I have no choice but to park outside.
cyclehiemer: Thanks for the discount code. this bike might inspire me to try touring. only problem is that there is a decapitated screw stuck in one of the rack mounts on the seat stay.
Bianchigirl: Thanks for the warm welcome, I will post pictures when its clean and ready to go.