If the frame isn't stuffed, even if you were buying the frame/fork alone, it's a pretty good deal at $1000. Another important place to check is on the underside of the downtube, near the junction between it and the head tube. Cannondale themselves state that this is one of the most common places for fatigue failures to occur.
The CAAD5s are IMO a good mix between durability and the typical Cannondale frame responsiveness/etc., they didn't go stupid with the ultralight aluminium stuff until the CAAD7. Then again I own an '02 CAAD5 frame (Saeco colours too!) so that's what you'd expect me to say
If you want to know how much it was worth in 2002, mine cost about $2600 (and that was an end of season mark-down) with carbon fork, Shimano 105 components and a decent but still lowish-end mix of other bits.
Not sure about what those bubbles could be.. my frame is going on 3 years and has had an 'interesting' life at times (commuting/city beating/unintended cyclocross/etc.), and there is no bubbling at all to speak of. Maybe it's a from-the-factory paint defect, or a paint touch-up job? I can't imagine it's rust, this is aluminium we're talking about.
FYI Cannondale's lifetime warranty applies only to the original owner.