I glanced at the pic , thinking the jug was inverted.
On second look, that lip is quite large. Since the gourged area is now at the bottom of the stroke it indicates the wrist pin is also loose and has beat out the connecting hole in the piston. The piston wobbles as it starts the up stroke. The piston needs to be replaced. This also means the connecting rod is now in questionable condition too.
IMO- You can try to salvage some of this stuff but you would be wasting money in the long run. I doubt you will get much run time out of this motor.
Whenever I get one where the damage is extended to the point of affecting the connecting rod .I don't bother with that motor anymore. I found it is more economical to replace the whole motor than take chances. Considering the cost of replacement parts for a total top end rebuild plus the time and labor, I can simply get one of these.
http://cgi.ebay.com/ebaymotors/ws/eB...m=400222401460
hard to beat the price when you add up the cost of individual top end parts. Swap out the final transmission shaft from your old motor, remove the brake connecting pin, gut the cvt of the kick start mechanisms, replace the fluids.. it's ready to drop in. About as close to a plug and play as you can get. I have used several from this seller with good results.