** Update **
So I pulled the engine and tore it down. I thought everyone might be interested in what I found...
both pushrods from #1 cylinder were bent - the one in the pic from the first post and the other was clearly bend mid shaft. And sure enough, after pulling the head, you can see where the valve kissed the piston (pic)

I figured we would find play in the connecting rod bearings, but after pulling the crankshaft and checking / measuring everything, the crank is in really nice shape. I took the head and crank to an auto machine shop. They are going to polish the crank and rebuild the head. BUT, he looked at the head and basically told me the whole story. He said he could tell the head gasket was leaking - if you don't see a really clean ring around the cylinder, its been leaking. And when it leaks, it usually goes to the coolant passages and pushes the coolant out and the motor overheats. When the motor overheated, the valve could have stuck just a bit and smacked the piston.
What I find interesting... and I guess it makes sense. If the valve hits the piston, it is slammed back so hard that it hits the rod and can bend the rod, basically in mid air.
Anyway, that is where we are at. The pistons were pretty scored however the cylinder walls look pretty good. I was sort of hoping to get away with just honing the cylinders, but I have to measure them and see how round they are. Apparently that is one of the first things to go on these little diesels when the motor overheats... the cylinders warp.
So I pulled the engine and tore it down. I thought everyone might be interested in what I found...
both pushrods from #1 cylinder were bent - the one in the pic from the first post and the other was clearly bend mid shaft. And sure enough, after pulling the head, you can see where the valve kissed the piston (pic)

I figured we would find play in the connecting rod bearings, but after pulling the crankshaft and checking / measuring everything, the crank is in really nice shape. I took the head and crank to an auto machine shop. They are going to polish the crank and rebuild the head. BUT, he looked at the head and basically told me the whole story. He said he could tell the head gasket was leaking - if you don't see a really clean ring around the cylinder, its been leaking. And when it leaks, it usually goes to the coolant passages and pushes the coolant out and the motor overheats. When the motor overheated, the valve could have stuck just a bit and smacked the piston.
What I find interesting... and I guess it makes sense. If the valve hits the piston, it is slammed back so hard that it hits the rod and can bend the rod, basically in mid air.
Anyway, that is where we are at. The pistons were pretty scored however the cylinder walls look pretty good. I was sort of hoping to get away with just honing the cylinders, but I have to measure them and see how round they are. Apparently that is one of the first things to go on these little diesels when the motor overheats... the cylinders warp.