thats the result of a worn valve guide or it jumping time causing the valve to drop while the piston was coming up and they hit eachother.

 

judging by that picture you have got some serious RTV problems in the crankcase. start looking for an oil pump, you're gonna need it. and your going to need to flush out the crankcase and tranny with a spray bottle and kerosene or brake parts cleaner.

 

So do you think I should buy new valves based on the spots on the piston?

 

Holy crap that is alot of RTV! if you put that together with RTV pieces in it then you can kiss your valve train good bye!

 

not only the valve train but the whole oiling system. i wouldnt be surprised if there isn't RTV welded to the cylinder wall and the trans gears.

 

So I pulled the motor and am getting ready to do a complete teardown. What specialty tools are required to do this?

 

just a flywheel puller so you don't mess up the threads on the crank.