Ok, well step two isn't quite finished yet, but I felt like giving you guys an update anyway, just to make you all feel loved. Plus I've got some interesting problems to work out. Anyhow, on with the show:
After the M52's head had been removed (to give it back to it's owner) I discovered a bunch of rust in the cylinders. Now any other person but me would commit hara kari when seeing what I'm about to show you, but I'm strong, what can I say.

This one is cylinder #1, there's a hair of corrosion there, not so bad.

This is cylinder #2, which is identical to cylinder #6, absolutely zero corrosion.

Here's where the nightmare begins. You are looking at cylinder #4 just at the bottom of the image you can see a little ring of corrosion on #3, but #4 and #5 are pretty much both the same. Bad. very very bad. Thankfully the corrosion isn't so bad that I need to bore out the block, it just needs to be honed. That can be done by hand with a special tool that attatches to a drill and is specially designed not to take any metal with it, just the corrosion.
I'll post some pics of that when I get around to doing it. Also you can clearly see that I'm gonna be spending alot of time with a wire brush and a dremel cleaning out all of the passages that have gotten corroded, as well as all of the corrosion on the block itself. I'll post up pics of that when I get around to doing it.

Here's a shot of Piston #1, you can see clearly where the exhaust valve smacked the piston if you look closely, or you can cheat and look at where the arrow I provided is pointing.

Here is a side by side comparison of the M52 rods (left) versus the M50 non-vanos rods (right). Believe it or not, the M50 rods are quite a bit lighter than the M52 counterparts and are also visibly quite beefier. The M52 rods are made using the cracked cap method rather than having a rod and cap that are cast seperately. The cracked cap method is cheaper to manufacture, probably why it showed up on the 323 engine (sorry shahab).

This closeup shows the retention ring that holds the wristpin in place. I just stuck a pair of needlenoses in there and pulled it out. Getting it back in is harder, but I did it one half of the ring at a time and that worked well. there may be a special tool to do this, but fuck if I'm patient enough to find it.
Well that's it for now, I'll update this thread once I've honed out the cylinders and I'm ready for reassembly. In the mean time, the conrods and pistons are off to the machine shop to get balanced.