In the absence of any other posts in response to your question, I vote to hone cylinder #1 and evaluate it. Clearly one piston must be replaced but that decision can wait until you see how the cylinder looks after honing since four over-sized pistons will be needed if all cylinders are bored-out. Good luck!
Thanks Willy. Didnt seem like many people were interested in this topic so I ended up getting a remanufactured powerhead. I will likely, at my own pace, rebuild this powerhead. But I dont want it to fail after a full teardown, so I would let the machine shop bore all cylinders to keep them square, mill the deck and heads, and balance the crank and rods (if necessary). All that work, plus a full rebuild kit (bearings, wrist pins, pistons, rings, gaskets) and we are getting into the $1500-2000 range. I got a re-man (all internals replaced, as well as boost ports and check valves, with powerhead gasket kit and repaint) with a 1 year warranty for $2600 from Hinkle Marine. I just want to get back on the water, and do not want to see this motor fail again any time soon.
All the metal flakes in the intake/exhaust ports, the mis-casting, and all the trouble this block has given me makes me paranoid to re-install it.