That piston is worn out in the pic.Replace it .If you check the piston to wall clearance it will confirm this.
The piston is not worn out. Machine marks on the sides and the top confirm that. What also I did see....the hole in the top of the piston. If it is not a hole the like I said before. Replace rings.
Well I put a new Episan piston kit in it and she started up on the third pull. At first it was blowing fuel back out of the carb really bad and would not idle. I pulled the carb and opened it up but did not find anything and put it back together. After that it started and ran great and would restare right up. I ran it for a little while but because I don't have a chain for it I shut it down. I want to break in in under a load. I enjoyed working on this saw, much more so than the 025 I have tore down and waithing on parts. I did buy a new compression tester from Northwoods Saw and checked the 038 just before I started it up and had 125 PSI, was hoping for more, maybe after it breaks in the rings it will go up.
Thanks to everyone for their help on this project.
Jim