Id see if you can have it bored for cheap, and add an oversized piston and new rings, prevent long term damage and start fresh and as MDB said, it could be out
of round, and worn
Some performance shops, small engine shops, machine shops will do it for very cheap, its honestly the better way to go if you can afford it.
As for the mild cams I know most people like Dyno Cams, but I prefer precision cams, and more specifically the PC 1003, its a great cam and does not require block welding, I have ran mine for two years, and I love it, There customer service is also Awesome
tell them your budget, and what your using it for, theyll help ya all the way through
Precision Cams - Our Cams
As for the 3 horse flywheel I would be extremely careful, If it is an aluminum flywheel off of a mower I would toss it in the trash immediately, as they are an explosion hazard and are known to shatter. If it is Iron and in extremely good shape It could help with Rev'ing the motor and what not,
But breaker points or not the flywheels are interchangeable, only the briggs equipped with a lighting coil would be different, Just be sure you run the newer ignition as breaker points seem to float after 4,000 RPM's