I had a needle bearing let go on my km 28.5cc engine,
It left worse drag marks down the side of the piston and liner than that of what is on yours,
I cleaned the engine out and reassembled it using a new bearing it would not start and compression was way down,
So I pulled it apart, replaced the piston ring as they are real cheap, i thought i would try to work with what i had
and it was back to running great, even pulling wheelies
You need to take a look and see what made the marks on your piston, clean out the motor with petrol and replace the bearing if that done the damage,
You may well need to replace the whole motor, but I would definitely try a new piston ring on what you have first,
Some pics on this post
http://www.rcuniverse.com/forum/fb.asp?m=9001819