No compression test?
Looks to be progressing nicely.
I tried to figure out before posting, can't. Did you have compression readings before? Or was it just a catastophic failure?
I rebuilt an M50 (?) (94 325) in 08. It had that same rust effect on the top of the cylinder walls. Honing cleaned it up (at the machine shop). It had a blown head gasket. The #2 was clean as a whistle (coolant scrubbing effect I suppose).