End result I would like it to meet or beat a 262 or 562 that would be sweet!
The light in the cylinder makes it hard for me to tell if the cylinder is saveable, but in many cases they are. Only thing you can do is try. I have come to prefer the method of using muriatic acid and hand sanding. I dip a q-tip in the acid and wipe it on the aluminum transfer stuck in the cylinder, being careful to keep the acid on the plating and not letting it run into the port windows where it will eat the aluminum cylinder material. After it fizzes for about 5-10 minutes, I wipe the acid out with a water soaked cloth. Then I use some 120gr sandpaper and work the area over by hand. Repeat as necessary.
Now, I own a 357 I ported myself and it is very strong. I also own a 359 with only a base gasket deleted and very basic beveling and case matching done to the lower transfers. The 359 is very user friendly and torquey with a broad power curve. The ported 357 is simply a high revving hotrod and will spank the 359 for speed in every situation, but I really enjoy both saws for what they are.
So you want your 359 to meet or beat a 562?? I've seen some very well done 359 that are very strong, and fast too. But were I looking to beat a 562, I would probably look to do the 357 conversion with some level of compression mod and a good port job. I'm pretty confident that my 357 would beat a stock or near stock 562 as it is currently configured. I'd say you could build a 359 to do it too, but it might take a more skilled builder than I am at this point to pull it off as in stock form, the 359 cylinder needs work to bring it to the same level as a stock 357. And then there is the fact that the 357 has crank stuffers and the 359 does not. So unless you fit your 359 with crank stuffers along with the 357 top end, it won't be a true 357 in the strictest most technical sense.
Even if you go the 357 conversion route, I would still try and save that 359 cylinder.
Walbro or Zama... The Wally has an accelerator pump and it fails eventually making the carb junk unless you have the know-how and desire to modify it to delete/disable the accelerator pump due to the fact that Walbro does not offer accelerator pump service parts last time I looked. Most folks like the Walbro (when in good working order) over the Zama as I have seen it said the Walbro is more capable of feeding a modded saw. I have only had Walbros on my pair so I cannot state an experience based position on that subject. But still, I would shoot for a Wally given the choice.
Make sure you get a steel intake clamp on that saw if it doesn't already have one.
Whichever direction you go, mild or wild, I think you will love that saw. The 357 and 359 are great handling machines that perform, almost the perfect specimen of design in terms of power and handling proportions...Kind of like a 4" K-Frame Smith and Wesson is the revolver every other revolver made wishes it could be... if you are into those.