That definitely sucks that it's doing that. I can't remember if you've had one of these engines out yet. Don't even bother trying to do this in the frame.
To get the engine out, the trick is to remove the starter motor. Wrap the frame up with split foam pipe insulation and zip ties. That makes it easy to lift and rest on the frame without damaging anything.
On to the repairs: I know nothing and I'm just sharing how I would approach it.
- From my experience with pulling one top end, I would not count on the getting it back together without doing Time-Serts on all eight cylinder fasteners. Mine pulled the threads with almost no torque at all. That necessitated pulling the engine out of the frame to get it up on a mill for proper insert prep and installation.
- I would also count on buying the ARP stud kit from Seastrom. Because they're studs, there's no access to do this in the frame anyway.
- For the cylinders: I don't see any oversize pistons in the parts list. Renewing those cylinders might be a challenge. Are they nikasil? I don't remember. If so, they can be replated to stock bore size. Seastrom should have piston kits. If they're iron liners, he may even have other solutions like aftermarket pistons or maybe there were some factory oversize pistons that never made the parts list?
- Same for the heads. Guides and valves have been regularly available on eBay and I'm sure he'll have inventory too. Yes, I've filled ports with water to see if it leaked out of the valve periphery. You know the drill with the guides: pull the retainers and springs and see if the valves are sloppy. I'd find it hard to believe a set of valves and guides wore out but, we don't always know how these bikes were treated.
What are
you thinking of doing with it? You could just keep it as-is and ride it. Not the end of the world. The bike is 26 years old.