Re: 7.5 HP Gamefisher dies, won't start
<This motor originally used points. I used one of those Atom Computer Ignition modules from Banta Saw to get away from points. It seems to work really well. When the motor was fully up to temperature and would not start, it was still sparking. >
A properly adjusted points/condenser magneto system works wonderfully well. I find I very seldom have to replace the points on veterans that I like bringing back to life. Unless they are badly burned (indicating a bad condenser) or the block that follows the cam worn off I simply disassemble, clean in thinner and polish them to a high sheen on a piece of worn-out wet or dry sandpaper, reassemble, adjust and degrease by dragging a few strips of paper cut from a heavy brown paper bag.
Since the points replacement modules have been indicted in some instances for changing the timing I would retrofit a good set of points to get back to 'square one' and see if the surging goes away.
<The motor seems to be running cooler, too with the gap in the blower housing closed.>
To function properly the motor MUST have the original shroud!
I looked for the article on checking crankcase compression---thought I'd bookmarked it but no luck.

Try googling 'checking crankcase compression on two cycle engine'. I suspect that lower crankshaft seal.
Afterthought edit: closely inspect the area under the flywheel to see if you can find oily deposits caused by a leaking upper seal before doing anything else! Whether you do or not carefully degrease the mag plate so you are starting from scratch in order to recognize the problem down the road.