The DIAS makes the entire weapon a MG, much the same as a registered receiver does. With a RR you can have an upper with any barrel length, bayonet lug, F/H, etc. Same with whatever rifle the DIAS is in.
HOWEVER - should you remove the DIAS from a post-ban receiver (such as if you were to move it between lowers) the rifle reverts back to post-ban status and all forbidden parts are once again verboten.
Other notes :
"Option number two is spend $6000 on a complete sear gun with a select fire mechanism (if those even existed prior to the 86' ban), cannibalize the gun and install the parts in your post ban gun."
What's a "complete sear gun"? Your first option spoke of the DIAS, so you must mean a RR in this case - especially as you differentiate between the costs of the two. As TaxPhd says, you can't "cannibalize" the parts to make another MG, since it's the receiver that's registered, allowing the factory hole and sear to be installed. If you rip out the Full Auto parts and use them as you please in a semi-auto weapon - not to mention having to drill a hole for the sear - you'd be "conspiring to make a NFA weapon", which is illegal. The BATF has ruled that full auto parts in a semi-receiver (or in the same room as a semi receiver) is grounds for a conspiracy charge.
"There are registered sears, bolts and receivers."
Registered bolts? Where? Certainly not for AR-15/M-16s.
"Ninety four ban was for title one weapons and machine-guns are title three. "....."Gun becomes a title three firearm and is exempt .. blah blah"
There's no such thing as a title three firearm. Title one weapons are long guns (shotguns/rifles), receivers and frames, and handguns. NFA weapons are title two weapons, and many are also title one. This guy probably means Class 3. Which is also wrong There are no Class 3 firearms. There are dealers in NFA weapons usually called Class 3 dealers; they are Special Occupational Taxpayers (SOTs). Class 1 SOTs are importers of NFA weapons, Class 2 are manufacturers.
"Only other option is becoming a Class III manufacturer and although fairly easy to do. It is also very expensive to maintain."
"Class III manufacturer" is the wrong nomenclature again, see above. Have to disagree about it being expensive, though it's somewhat relative. Becoming a SOT requires a FFL, local zoning approval, BATF approval, usually a separate shop or office for business (BATF is frowning on homefront FFLs these days); additionally for the Class 2 SOT (manufacturer) may require EPA checks and typically more zoning approvals. Maintaining the SOT requires a yearly fee ($500-1000, depending on sales), some yearly sales and manufacture of NFA weapons, and documentation (not much more than for the regular FFL). Once you get there - if you're legit - it's not hard to maintain.