Its not uncommon on the YB to have valve/piston contact and will run ok like that however there does look like a nasty little chunk in the chamber and face area someone here would advise you on that more . The pics of the 2wd 88 engine looks like a reasnoable base to start but if it was myself i,d be having it apart and checking as your guessing . Aslong as the major pieces are all ok and machineable if nessesary then it does,nt have to cost the earth and can make a nice engine .

Can you check the bore size ? Does it turn over all ok ?