There's not supposed to be a groove. The crown should just be one smooth continuous radius. Your bearings have worn through the chrome plating and into the steel race. Definitely a candidate for replacement. If it's smooth and you can still get everything to tighten up properly, then if you keep it lubed and you can probably continue riding it for years. But a new Tange headset is like $12 and some shops may be able to hook you up with just the crown race for even less, so I'd just replace it now so I don't have to do it later.