The rod looks ok. Just check that side to side and up and down play. Make sure it's in spec. The blue isn't anything to worry about until it's on the big end of the rod!
That's not that much damage. .010" or .5mm is actually a lot of cylinder wall taken out. That'll clear up a lot of damage.
Go to the hardware store and ask them for concrete scrub or muriatic acid (same thing). Use a q-tip and rub the liquid on the aluminum that's stuck to the side of the liner. Give it a few seconds and then wipe with a paper towel to remove some of the aluminum. Do this several times to remove the aluminum inside of the steel liner and then wash the cylinder with soap and water to deactivate the acid. Then spray the cylinder with light machine oil (or WD40 or anything else you've got) to keep out the rust.
Once all of the aluminum is gone, you can accurately judge how much damage to the steel was done.
Also, if any acid accidently runs down a transfer port, intake window, or exhaust port. QUICKLY wash the cylinder with soap and water to deactivate the acid. It will eat the aluminum you do want just as fast as it will eat the aluminum you don't want.
