Well, the numbers are definitely not good, and if you have ruled out valve adjustments, I would say it needs a rebuild.
Knowing that 356/912 motors are just a wee bit pricey, I'd suggest an alternative, but this depends on how creative you want to be, and how much cash you have to work with.
I have a good engine in my 912, and really don't want to run the risk of ruining the original just by driving it around town or on trips, and then forking over big $$ for a rebuild. So, I'm pulling the engine, storing it away, and putting in a Type 4 engine (I have five). Essentially, I'll be creating a 912E but in an early body style.
The engine will fit, but you need to make a new engine hanger, rear tin, use the 914 flywheel and clutch setup, and work out a carb (webers) and exhaust setup.
If you were to find a good 914/bus T4 engine (even a 1.7L), you'd be on the road for less than half the cost of the 912 rebuild, and you could use the time to go through the stock engine while still driving your existing car.
Then again, you could build the T4 up into a hotter 2270 for about $5k, and surprise some 911s.
I like this idea because you don't really modify the original car, you still retain the stocker to replace in the future, and you gain a torquey, very reliable alternative to the typical VW type 1 conversion people do.
Just a thought.
Later,
G