The cylinder is most likely from a stuck intake valve, or burned valve. I really doubt that it would be the cam- sounds like a good project.
You can easily push 250-270hp in these engines, with the 300 mark attainable. 4bbl cam, good head work, headers with good exhaust, Clifford intake, a good ignition (aftermarket MSD or Crane) and so on. I've made a factory-appearing setup go to 260hp without any headaches.
