I picked up this bike today, there seems to be quite a gap between the chain links but it's not at max adjustment yet and the slack is ok I can't make up my mind.:S

A way I was shown of checking for a buggered chain before was,
Grab chain at the most rearward point of the rear sprocket and see if you can lift it off the
sprocket. If you can lift it anymore than 2-3mm away from the sprocket it is worn.
It dosent matter if the chain is very loose when doing this as you will stil get the same result with a loose or correctly tensioned chain. Hope this helps.

Sorry for the crude picture but hope it helps explain things :D

I can see the wear pattern on the front sprocket is quite pronounced in that pic...
On the leading side of each tooth it looks dished out and asymetrical.
If the front is like that, it's probably a fair bet you should replace both sprockets and the chain.