I still think 125psi is a pretty good # to get on a cold compression test with stock pistons, or am I thinking wrong here
It's been a while since I did a cold compression check on a stock motor but I seem to recall getting between 100-115 on a used motor. Also, the fact that they're all even (+/- 2psi) to each other I'd be inclined to rule out valve damage unless each valve was damaged in exactly the same way. By all means, inspect for damage while you have it off. Just holding the good thought that everything is OK Terry 
Let me know if you need another stock bore headgasket rushed over. I've got several leftovers.
G'Day Sean, thanks for that mate, you truly deserve to be showered in beautiful women or good Bourbon, or perhaps good Bourbon flavored women, for being such a good bloke, ha ha! I don't need a head gasket right now mate, I've got a few here, but thanks anyway.
The compression thing is interesting, I've got another engine (a K6 engine I scored at a swap meet) in a K2 frame, it'd be lucky if it was pushing much more than 100 psi when hot, it doesn't leak or blow smoke, but you can crank it over with your hand no problem, yet it runs and rides really well, although it'll be getting a top end rebuild done on it this year too.
I'm hoping that your inclination that there's no damage is right, and maybe the valves whacking into the pistons caused the bike to run like crap without actually damaging anything, but that thinking defies logic, even though I can't see any damage at all on the valves. Still, I'll check that out once I assemble the stock engine and get it back into the K1. If it is good, I'll start rebuilding another "racer" engine right away, but this time I'll use one of my 836cc kits, with those nice deep valve pockets, ha ha! Cheers, Terry.