Breathing new life into the 318 in the Scamp!

I think your second option is the best, you won't have to pay for cylinder honing (at the least) going that route.

One mod I would highly recommend... Go over the edges of the combustion chambers with a grinder and smooth them down as round as possible. Even maybe as far as cutting off the "tip" that sticks out in between the valves, you want to help the flame travel out to the edges of the cylinder rather than just staying under the chamber area.