The pitting looks pretty deep. Also the fact that the hole has "rusted" bigger indicates that there's some serious issues going on here. I'd be worried about the wall thickness almost anywhere along that tube being reduced to where it may collapse. The rust around this blow hole may be just the tip of the iceberg or it may be stricktly a locallized spot.
If it was mine I'd likely test the tube and the rest by rapping them with a piece of wood looking for any soft spots that would indicate internal rust that has thinned a wall enough to allow a localized collapse. If that occured then the frame is definetly toast.
Some of the other folks may have some other ways of testing for the same sort of thing. Hopefully they'll pipe up with suggestions. But either way this sort of damage isn't something I would just ignore if it was one of my frames.