[kcducttaper]

To me, that looks to be a bit of flash rust.

Unfortunately, if you want to do a proper repair job and fix it right, you may have to pull the engine and get it machined out. You *might* be able to sneak by with just a re-hone and some fresh rings, but that's being pretty optimistic.

If you just want to slap the engine back together for a couple months and then get rid of it, you would probably be ok as long as it's pretty smooth, but for anything long-term, I would definitely machine it out properly. Every time the rings go past the rough spot, they will wear down more and more, which would cause more problems in the future - mainly blow-by from the worn rings.

My $.02.