Just FYI...I've done the whole turning of the rotors and what a freaking mistake! It's been no more then 8 or 9 months since that job and I've just replace the rotors and pads this last weekend. I ordered the fronts from R1 Concepts (drilled and slotted and AXXIS pads) for $172 and some change. Just my $.02, replace the fronts.
Thanks SO much for all of your input.... It is much appreciated. I am going to replace the rears today, and leave the fronts alone.
By the way, you asked about that lip. Yes it is normal and it shows teh rotor is worn by about that amount. The rears hardly wear and can get through two pads replacements.
I had rough rears too on our '98 E320. It was caused by corrosion when the car was parked outside in Florida for 3 weeks. Actually, maybe not corrosion - more like an interaction between the pads and the disk that caused pad material to be transfered to the disk - there were sort of imprints on each disk.
Braking went from being perfect to totally unacceptable vibration and pulsing. The fronts were also affected but wore themselves smooth. But I changed disks & pads anyway, thinking they were the problem. I have old ones and will use them next time. The rear disks were taken off and smoothed off using abrasive paper. They are now OK, but not as smooth braking as they were.