Considering the use of the vehicle is important.  For daily use I would stay
close to the stock configuration for torque's sake.  That includes the
heavier flywheel which will keep the driveability good.  If the law allows
it in your state, a free flowing exhaust manifold and muffler can add a bit
of horsepower without compromising the low end performance.

>1.  If the flywheel is lightened, will that give improved response to
>throttle?

Yes, but without any other mods it will be most noticeable only in neutral,
or after you have begun to roll in first gear and reach your torque / hp
peak.  Then rapidly flatten out as the engine is not making any more power
or rpm.  After the shift to second there may be a bit of a difference, but
negligible as the greatest resistance to acceleration after the initial roll
out is the increasing wind resistance.

>2.  What about the down sides, such as increased vibration, easier to
>stall while lugging, etc......

Don't lug that engine.   You are right about the increased likelyhood of
stalling, as the stored energy in the flywheel is going to be reduced.  This
can be compensated for by increased revs and more clutch slipping, but it'll
be harder to drive and the clutch may not last as long.

>3.  If not this, then how to get an easier revving motor?  Get the Audi
>5 cyl?

How much work are you willing to do to the engine?  How much money are you
willing to spend?  What are you gonna be using it for?  I'm sure that given
answers to these questions there are many group contributors who can give
specific advice!

Respectfully,
Steve