Is it a reed valve engine? If so your reeds aren't seating. If not you likely have a severe crankcase leak somewhere. Check the crankshaft seals, if it has them. Crankcase gasket? In take manifold leak? I doubt it because the intake maifold is probably cast into the crankcase.

this website is for trimmers but you might find your engine here:

http://www.odref.com/homelite/string-trimmer/imdex.htm

Bill