Since you have the heads off - oil the bores a bit while you're at it (I use my hand to manually rub in some engine oil or assembly lube). Also, use some decent assembly lube on the valve stems (where they're in the guide) and might as well put some 'break in' lube on the bottoms of the lifters. This engine has sat awhile, so getting her "greased up" is never a bad thing.
On cam timing - I think your check is good, but just to further elaborate. If you have #1 cylinder on TDC (compression stroke), then both valves should be closed. As you rotate the crank clockwise, you should see the exhaust valve just start to open right before BDC and as you continue around the exhaust should fully open on the way back up (exhaust cycle) - and when you're back to TDC, the intake should have just started to open and the exhaust is just about closed. (This is the beginning of the intake cycle).
My bet is that the valves were not seating - due to however they did their work and the need (in this case) to lap them a bit. The valve you showed was probably an exhaust valve - given the big/wide seat on it.
Keep us posted - nice work on your end!
