Looking at your pics, there are a couple of things I'd do before I opened up the wallet for big expenses.
First, head to a small engine repair shop with your engine info, and get the correct flywheel key for the engine. Looks like the wrong key had been used (or a steel one) and jammed in previously. You need to see if the flywheel will lock in place on the crank. If it moves (or wobbles), then you might have issues keeping it in time--these points engines are very finicky and a couple of degrees off either way will hurt. If the flywheel "locks" ok, then in my view the crank is salvageable provided you don't have scoring on the bearing surfaces. The PTO side doesn't look too bad, I've had cranks with some excess drilling for set screws.
Second, you've got some scratches on the piston skirt. Pics don't tell the whole story, so try some fine steel wool and a lubricant, and see if they polish out. The point is to see how bad they really are. You should also use a digital caliper with long arms to measure the piston OD on multiple axes. The Tecumseh manual will give a reject size. Tool:
Search results for: 'caliper'
Third, cylinder wall scoring. Steel wool is NOT the way to check here. Micheal correctly suggests checking to see if it's out of round. Use the caliper referenced above and a telescoping gauge. You can take multiple measurements as shown in the Tech manual. This should give you a good idea if the bore can be saved. Then, you could hone the cylinder to see if the scratches diminish. Telescoping gauge:
Telescoping Gauge Set 6 Pc
You'd need a good cylinder hone kit to go any farther forward. I'd invest $25 for a couple of must have tools for the tool chest and a key first. E-bay is remarkably dry for HS40 parts currently.
Hope this helps you get started.