I bet its cavitation.... that block needs to come out. I'd get a short block from promar, check your current heads, and throw it in. Alternately you could sleeve #4, but you really should sleeve all the cylinders and that would be expensive. You had better at least sleeve #4, 7, and 8, as these are the three most likely to bite you with the cavitation worm. Sleeving is controversial. Most guys here like the idea, but recently we have had a dissenting opinion or two. i have not built a block, so I'm not qualified to vote.... but one thing is for sure, you really need to have a machinist who knows how to install dry sleeves in a diesel...you want him to warranty his work and have done this a few other times. This will cost you anywhere from $75-150 per hole depending on your market. While you're at it, you might as well put a new set of rings and bearings in and if you're pistons aren't well within limits you'll need new ones of those too. Its really a shame cause your compression is good. The book specs are 2195-440, but in the real world you look for ~300-~500 and the lowest hole within 25% of the highest. Lets take your two extremes #3 and 5 at 390 and 460 respectively... 460X.25=115 so for you to have a hole out of spec you'd need to see one <= 460-115=345...as you see well within spec, but if you keep driving it with the big C the block may just lock up and destroy itself. Sorry to hear about it,
JD