water acts as a nucleophile and attacks the carbon attached to the methyl and the hydrogen. The anion on the carbon with cyano groups then grabs a proton.
A lone pair on the alcohol group comes down and kicks off the carbon with the two cyanide groups and a hydrogen attached. The anion grabs another proton forming your C3H2N2.
Also you have your acetylaldehyde.
The acetylaldehyde and the hydrate would be in equilibrium with eachother.
wont the cyano groups move to carboxylic acid groups in water?