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As you mentioned, to remove the steering wheel lock from the steering column requires the ignition to go into position 2. This allows a small hardened button to push in so the lock can be removed.
It sounds like probably the only hope now is to work on the entire steering jacket removed, which isn't all that tough. Then you have a few options; You can heat the small button up red-hot with a torch and let it cool slowly, which will remove the metals "temper" to allow it to be drilled out, or I usually just pry back on the steering jacket (with the clamp removed) and that'll allow the steering lock to be withdrawn from the jacket tube. The you'll just need to install a new lock and cylinder.
Gilly
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