How do hydraulic flat tappet lifters fail?

I may have missed it, but I don't think anybody thinks the block is screwed. Do you have all the lifters and the camshaft out? I would pull the engine apart, check the bearings, bores and whatnot and go from there. It might not be worse than a cleanup, re-ring and new bearings. You'll never know until you get it apart though.
I’m halfway kidding because Rusty helped out last year when I had to rebuild it. He knows this engine has a history, and I suspect he might not think the original problem was fixed.

All the lifters and rods are out, except for the #1 intake lifter. It’s mushroomed a bit and will need to drop out when I pull the cam. I had all the lifters and rods lined up in order until the damn dogs ran across them. Now I have no idea which came from where! No matter, I’m replacing all anyhow. But I did want to be able to inspect the wear in respect to where they came from. I do know one of the lifters from #7 looked funky on the cam side.

The cam will likely come out tomorrow, assuming I can get this damn damper puller to work. Initially I was going to just inspect the rod and main bearings and replace if necessary, but now I’m thinking I might just replace them anyway and not take the chance. They’re too affordable and too important to not just do it.