Pieces of steel in cylinder??

.040" under, or more, should be OK for your use of this engine if the crank polishes out. But you need to ask the machinist to measure it first to make sure it is not worn too far. The crank pix look to me like it had some wear so don't get too far ahead of yourself; no way for any of us to say without putting a micrometer on it.

If needed, I just saw a crank kit with crank and all bearings (mains and rods) for $209 less tax or shipping. You might do better on another box parts store site.

Will you re-use your existing pistons with the cylinder honing? Oh, I forgot that damaged one. You COULD replace just that one. Not saying you should but if $$ are tight....