Really does suggest there was some water incursion. If not a head gasket or cracked block, maybe the water cooled exhaust manifold is failing, leaking into the exhaust port?
Now you've got a second cylinder that is questionable, unidentifiable after-market piston you may not be able to match, metal flakes in the oil, block and head surfaces need to be cleaned and then trued before gasketing, etc. There may be similar issues with the other side and the rest of the rebuild on this engine.
Not what you want to hear, but I don't know if you're going to be able to do this in frame and not risk losing the engine to another failure down the road.
If it were mine, at this point I would say pull the engine, tear down and inspect top to bottom. If nothing else for just peace of mind.