Also called infantile seborrhoeic dermatitis, cradle cap is a temporary and harmless condition.

Caused by excessive oiliness of the skin and extremely common in babies, cradle cap usually appears during the first few weeks of an infant's life. It can be identified by greasy or crusty scaling patches that may appear yellow or gray, and is not unlike a mild form of eczema. In very rare cases only, the condition can spread to the face or body - if this happens, the baby should be taken to a doctor. The best treatment is brushing the hair with a fine-toothed comb in the morning; a mild baby shampoo can be used as well. If a doctor determines that the case is exceptionally severe, a weak hydrocortisone cream may be used. Although mineral oil can be used, it should be noted that some individuals believe applying oils to cradle cap actually makes the condition worse. Dandruff shampoos are too harsh for infants and definitely should not be used.

Sources
http://www.alternativeparenting.com/health/cradle_cap.htm
http://www.netdoctor.co.uk/diseases/facts/cradlecap.htm
http://www.medbroadcast.com/health_topics/womens_health/babies_moms/babies/index.shtml?cradle_cap.html