It is caused by not changing your coolant often. Corrosion built up and ate away those parts. It is pretty common from what I have seen. It isn't ideal, but it shouldn't hurt you. Just torque your head gasket properly and it should seal. Notice I am saying should, because I am not going to guarantee that the rest of the metal is structurally sound. Corrosion weakens metal. Also, those are rather large chips compared to others I have seen. Those sleeves look nasty too. Where did you get this block?