How do I put this headset and fork together
 

I am building up my first bike and I am unsure about putting this particular headset together. The frame is a ~01 or 02 Specialized S-Works M4 with a Time fork. Along with the frame and fork I was given a ahead headset (in a bag). The headset has bearings that are contained in a sort of cage holder and there is a ntural cup in the frame to hold the bearings. I have several questions -
1. Do the bearing side or the holder side go against the frame cup.
2. There appears to be some rust discoloration on the one set of bearings. Can I just clean and regrease them and still use them? If not, where do I buy another headset?
2a. Despite the fact this is an aluminum frame, there appears to be some rust discoloration in the top frame cup. What should I do to clean this, and how can I prevent water from getting in here in the future?
3. Is this an integrated headset? It really doesn't look like any mountain bike headsets I am familiar with.
4. Its a carbon steerer fork - is there any extra precaution I should take on headset installation.
5. There are two pins that came with the headset bag and I can't figure out what the heck they are for. You can see them in the pictures. Do they go somoeplace else on the frame?

I attached some pics. The first and second one is the fork with the one set of bearings on it and the other bearings that have the rust discoloration and the top headset cap. You can also see the two mystery pins. The third one is a slightly blurry pic of the top cup with the bearings in. The final picture is how I was thinking the top would go together. Its the bearings (holders toward cup), The headset seal ring, the cone wedge, three spacers, the stem, and then the top cap with the star nut bolt.

1. The way the bearing retainer is shown in the picture looks correct, and it'll be obvious if they're in upside down by the steering smoothness.

2. You might try a scotchbrite pad to clean the rust out of there. It's a precision ground race though, so technically, it's no good anymore. Replacement is the best option.

2a. The frame and cup material look like aluminum, but the bearing race inside the cup is steel.

3. Looks like a regular press in headset to me.

4. Carbon steerers require expansion plugs instead of star fangled nuts. It looks like your steerer already has the correct part installed.

5. Those pins are cable end crimps -- not part of the headset.

The fork on this is a time stiletto, and I think it has a 1" steerer. Should I just try and get a replacement headset entirely, or if there some place I can just get the bearings in the holder?

One other thing - How do I measure what size headset I need. The diameter of the fork stem appears to be 1". Is this the size HS I need? I am having a lot of trouble finding a 1" headset. I may just have to try cleaning and using the current one.

The fork steerer tube outside diameter will either measure 1" or 1 1/8". This is how headset size is determined.

You might just take one of the bearing/retainer assemblies to a local shop to see if they stock replacements. 1" threadless headsets aren't as common as they used to be, but there's several still available if you look.

Clean it up and see what condition the races are in. You can always get new balls from your LBS, any good shop stocks the common sizes of loose balls. If you are careful you can pop the old balls out of the cage and pop new ones in. Or you can just use loose balls, stick 'em in place with grease while you put everything together.You may actually have room for one or two more balls in each side if you chuck the cage. Just be sure to get a few extra balls if you buy loose ones. If you don't have extras you will lose a few. If you have extras you won't need 'em.

If you are going to get a new headset, you might as well take the whole thing into your LBS and have them make sure you get the right thing, since they have the right tools to get the old stuff out and the new stuff in without buggering up the frame.

I just talked to the bike shopo and they said the bearings side not the holder side goes towards the frame. Is this correct? Its the opposite of how I have it ini the pic.

Usually the bearings can be popped out of the retainer and new ones popped in. I can't quite tell from the pic, but most bearing cages allow for this.

It's a bit hard to describe which way is "up" with bearing cages, but you can figure it out for yourself by thinking about how the thing works in the first place. You've got some bearings sitting in a flat cup in the frame and there's going to be sort of a cone shaped thing going into the middle of them. So put the cage on a flat table, and the side that allows the bearings to contact the flat surface is the part that goes against the frame.