Well, sorry bout yer luck. At least you had a good time with it first.
Where are you located? This will help with getting help. If you were my neighbour I'd work for beer.
Of course the Dealer will recommend everything. Lets not call 911 when you may just have a boo boo. The way to troubleshoot the problem is to pressurize the bad cylinder at top centre of it's compression stroke with shop air pressure. Bike in first gear with rear brake full on. Now where is the air going? Out the exhaust? Bad exh valve. Into the airbox? Bad int valve. Into the crankcase? Bad rings. Into the radiator? Bad head gasket. Etc.
Sounds like a head gasket to me. There was another guy here with the same problem but under warranty. He was in SA travelling I believe. Got a new head gasket.
There's no point removing the engine until you properly diagnose it first. Then, evaluate the damage step by step as you remove parts. Stop disassembling when you find the smoking gun. Look in the valve adjustment threads for detailed information on disassembly. Paying for the Repair CD would be worthwhile for a mechanic friend to browse the night before.
There was also a near new engine for sale in the Flea Market I think went unsold. It was a 650 twin but over 90% of the parts are the same. You could throw it in "as is" or swap the cams over. A detailed look in the parts fiche would tell you the differences. http://www.ascycles.com/Illustrated_...catname=Engine
It would be cheaper and faster this way. Then sell or repair the blown engine.
You have options. Troubleshoot further before shooting the horse.