This motor has to be toast, my question is how toasty. Listen to the video attached and take a look at the cylinder scoring I can feel it with my fingernail just barely. Being new to engine rebuilding (I've done one), I'm guessing a new crank and a bore + piston. There was a "sandy" residue on the crown of the piston. I bought this bike as a basket case, the owner said it had been dumped in the UP of Michigan near Pictured Rocks sand dunes..on a previous post it was suggested that it be flushed with diesel, I think, to get the sand out...
By the way the stator looks new, I think the first time it had been opened up by the looks of it..

After further disassembly...the answer is yes. Piston scored, cylinder scored, crank crunches with sand in it. I think I am off to Bill Bune in Anoka MN to see what he can do.

I've been in a few motors and the good thing about yours is it probably wasn't run with sand in it...just seaped in if submerged. The cylinder looks decent....but my opinion is to separate the cases and thoroughly disassemble. May not need anything inside replaced...but I would do crank bearings and all seals at a minimum. Depends if you find rusty bearings inside..then probably replace ALL bearings...some are discontinued and difficult to find. If you plan on keeping it or selling as running...you need to break the cases apart. Just my 2 Pennies.

BTW...I know it is tempting to keep turning over by hand..but stop!

Also...just FYI...I thought I had a similar situation but the light grinding noise turned out to be grit between the flywheel magnets and coils. Close tolerance there. It wouldn't take you long to pull the cylinder and have a look at the crank/lower rod area for rust.

Thanks, I'll split the cases and show what I find, hopefully you are right and its not as bad as it first looks...stay tuned

Split it apart this weekend take a look at the pics, the crank had considerable sand in it. Bearings were oil coated but it was rust colored oil, I think I will need new bearings & seals.Check out the Bike Buzzard Kit . Washed it out but I think I'll have to send it to Bill Bune for a rework along with my cylinder and ask him to provide a piston. $$