I'm going to make an ASSumption here. You had the head off and didn't mention an extremely worn or scored cylinder. The engine also looked like it was run on 2-stroke mix. My ASSumption is that the rings are stuck.
I know you're not scared of disassembling your engine, but if you
wanted to avoid pulling the piston here's what I'd try:
1) Warm up the engine (just warm enough where you can no longer hold your hand on the head). Remove the spark plug, and with the piston fairly high up in it's stroke (just to you can see better) pour Sea Foam into the cylinder. Just enough so you know it has filled the piston dish and spilled over to the top ring. Let that soak for an hour to a day. Check up on the level every now and then to make sure it didn't all leak past the rings, top-off as needed.
2) Mix up 1.5-2 oz of Sea Foam in 1 gallon of gas. Drain your gas tank and refill with Sea Foam gas.
3) Change the oil and add 1.5-2 oz of Sea Foam to your fresh engine oil.
4) With the spark plug out and one hand (or a helper) holding a shop towel over the spark plug hole, turn the engine over
slowly a couple times, then a time or two faster like you're actually trying to start the engine. That will ensure you don't hydro-lock the engine when you reinstall the spark plug and try to start it.
5) Replace the spark plug and run the engine (preferably at varied load and RPM) for 30-45 minutes, then check the oil. Repeat until it looks like it's time for an oil change.
6) When the oil is ready to be changed restart the engine one more time and run it until it's back up to operating temperature. Once the engine is warm start spraying Sea Foam into the carb throat with the engine running just a little above idle (you could use a spray bottle set to a medium or fine mist, or aerosol Sea Foam). The goal is to spray enough Sea Foam into the carb to stall the engine.
7) Let the Sea Foam do it's thing to the carboned up rings for 15-30 minutes while you change the dirty oil out. This time when you refill the oil you should probably only use 1-1.5 oz of Sea Foam in the oil.
8) Restart the engine and spend about 5 minutes beating on it like it kicked your dog. (By that I mean 3/4 to full throttle, heavy engine load if possible.)
9) Use the motor normally and change oil as needed.
This ASSuMEs your problem is a stuck ring and should work in all but the most extreme cases. If it doesn't work your problem probably isn't stuck rings and you're likely dealing with a scored cylinder. Your options then are: fix it right with new rings and a honed cylinder, or try your luck with 1/4 can of the "Engine Restorer" with CSL (Copper, Silver, Lead).
Supposedly the stuff works... I can see the theory behind 3 very soft metals (temporarily) filling scratches in your cylinder wall, and
post #19 in this thread is a guy that claims he (fairly) scientifically tested it in a well worn 3.5 HP Briggs.
