looks like you had a blown head gasket at cylinder #4 on the intake side of the block. look at the back of the head gasket looks like coolant on the gasket to me from the photo you took... from what i have learned, the most common place for the M42 head to crack is the large coolant channel next to cylinder #2...
I would also tell you to take a roloc pads and clean the bottom of the head, and check it very carefully for cracks, from the photos you took i can not see any cracks. However the head was not perfectly clean when you took your photos.. I recently rebuild my head, including 2 cracks, all new lifters, 4 new exhaust valves, all new exhaust valve guides, and new valve seats cut. my bill was right at 800$...
You can take the cams out to check the lifters, if they do not rebound after being compressed they are shot.. a set of new lifters is right at 200$ from blunttech, and he was the least expensive i could find.
Good luck on your adventure, i went though the same thing last December......