Steve,
Quote:
could it be the points are firing twice?
Yes - that's exactly what happened with mine, even with the gap within tolerance. I've never had this happen with any other points ignition. This one really sucks.
The water doesn't sound good. I don't know if it shorted out the plug, but I hope not - that may mean you have some water in the crankcase, which you'll have to remove. Hopefully your fuel tank isn't totally rusted inside like mine was. I would definitely drain the tranny oil if you haven't already, and inspect it for evidence of water. It took about five changes for my oil to come out reasonably clear (as you can tell, my bike wasn't exactly lovingly maintained before I got it). It runs fantastic now, though.
If your head gasket still has all the black fiber material intact, go ahead and re-use it - I do it all the time. I run my motor for about five minutes or so before pulling the head; when I've removed it cold, I've usually left chunks of the fiber behind. NOS head gaskets come up on eBay from time to time, along with most of the important parts.
The crank seal is Honda P/N 91204-360-003, and the base gasket is 12191-373-306 (-373- is the MR175 model code). Both these parts are still available. After using Babbitt's Online, MR Cycles, and BikeBandit for a long time, I now use the Web site of my local Honda dealer to order parts, then pick them up at the store. It's a little more expensive, but very fast - and returns are much easier.
I'm probably the wrong guy to give advice if you don't want to start throwing parts; I bought my MR for $180 and then dumped about three grand into it.

I've never had more fun with any other bike I've owned, though, so hopefully that counts for something. Just for what it's worth, I tore my bike down to just the frame and motor, and there wasn't one thing I removed that didn't need servicing or replacement.
Ray