I also don't think that Werks or Larry sold me a bum engine, just that when push came to shove, Larry's passed the buck right along..
I feel for you man, but Larry's is my Local Hobby Store and it is the best around my entire state!
What Larry's is doing is called sellers service, they turned you over to the people who make the engine. Larry's only sold you an engine, they do not claim to support or manufacture it, and therfor warranty it.
Also you should know alot of manufacturers are limiting their warranty work to having an actual receipt from a hobby store...buying on ebay is soon going to mean buying sans warranty.