Considering it was in the junkyard sitting for who knows how long, the valves may have not been fully seated and allowed water to seep in. You all are so quick to trash the head as cracked.
x2. That's "normal" crap that is left after water infiltrates. The biggest issue will be rust piting on the cylinder walls and the condition of the rings and piston in that hole. I've seen much worse cleaned off and run and that's not a blown head gasket.
