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Why would you grind those?
The bike was unable to start in its current condition. I'm sure the valves are leaking, but I think the timing should have been fine. Now I'm taking it apart to lap the valves and make sure the timing is right. Hopefully after this I'll be able to actually start it.
Would like to have seen a before pic to see if they were bad enough to leak badly. But the seats don't look burned.
I don't want to be a miserable bastard or stop anyone from having any fun but it seems to me that your knowledge of bike engines and basic mechanics at this point in time is so lacking that you should really stop this project before too much more damage is done. I really don't mean to be rude but honestly is the best policy here.
This is what I recommend. Spend some time reading up about valve trains, springs, pistons, engines and general bike stuff. Start here: http://members.dslextreme.com/users/bikecliff/. There are all kinds of articles there that will help you with valve lapping and the like.
Try to find a GSR member near to you who is willing to spend a couple of hours with you looking into your engine. Honestly, stuff like cam chain timing and the like are hard enough to understand for guys who have been ripping these engines apart for over 20 years.
It is so difficult for any of us to help you on a forum like this when we know nothing about your level of experience with these things. It just seems that from what you have written that you are in danger of making things worse because you really don't know what you are doing.
The 2 most obvious ones to me are; you need to hold the throttle wide open when you are doing compression testing (it will tell you this if you read anything about compression testing or look at any YouTube vid) and secondly you left the collets out when you re-assembled the valves and springs. Without the collets ("little dowels" as you call them) the valve will not close at all. I'm guessing you might just get a 40psi reading even if all your valves were stuck open.
The other thing is that cylinder wall does not look good to me. You need to get this checked physically by someone that knows.
I just think you ought to get someone over to take and look at your motor whilst it's apart. Get some help from someone. There is only so much we can do by remote from here.
I want you to get that bike back on the road and for it to be safe a reliable and right now I don't think we are going the right way about it.
I took pictures of the cylinders as well.
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These cylinders are wasted from sitting with water in the bores, that's rust in a nice straight line because thats where the piston rings were. Rings are probably toast too. Easy fix, replace the cylinder, pistons and rings with Ebay stuff. However, that same water also likely ruined things down inside the engine as well. You probably have rust on all kinds of stuff down inside there. I bet if you were to pull the pan off the bottom of the engine that water would still be in there. Take a look.