If doing the work yourself, you have more money available for parts, which is good.
Here is my recommendation, you'll need to research it further for specifics, as my memory is foggy on some details.
I would install heads off a 5.2/5.9 Magnum - they have 1.6 or 1.7 rockers, significantly better ports, chambers, bigger valves than LA 318 heads, etc. They will increase your CR, increase power, increase mpg - a winner across the board. However, they oil the valvetrain via the pushrods, so you need to make some other changes from the cam-upward . Read this, and netsearch for a few other articles to get a consensus on the info:
http://www.hughesengines.com/TechArticles/2magnumlaheads.php
You would need a Magnum-specific intake manifold, and the heads don't have heatrisers, but some guys block those off anyway.
Installing a whole 5.2 Magnum would be a little better even, as you get a roller cam and some other subtle improvements -- but I understand wanting to keep a 32k shortblock. And you'd either need to run an elec fuel pump or swap the timing cover-outward to run a mech fuel pump + Hughes cam eccentric adapter).
There are some other details to watch regarding Magnum intake manifolds and the location of the waterneck, but review pictures of the intake before you buy and think 2 steps ahead. It's not a big hurdle unless you have AC. (Magnums use serpentine belts and reverse-rotation waterpumps, so be careful what parts you swap).
Magnum exh manifolds are touted as flowing almost as well as early 340 exh manifolds, and are fairly cheap vs headers or 340 manifolds. The 92-93 manifolds have a larger-dia outlet, so those would be more desirable, although on a 318 it likely doesn't matter between sizes unless you cam up a bit.
Factory 318s were rated at 230hp gross, then in 72 dropped to 150. We might speculate that a pre-smog 318 would have 180 net hp? Copcar 318s of hte 80s were rated at 165-175hp, with a small 240deg cam, higher-flow 360 heads and intake with a 4-barrel. I think that assuming 180net hp on a 68 318 2-barrel is very fair.
But - 5.2 Magnums were rated at 220-230 hp net, and their cam is also in teh 240deg range, so that's a 40-50hp difference. Yes, the EFI helps on them, but the heads and CR are the big key - one can presume for any factory engine built after perhaps 1990, that hte newer the head, the better it will perform in hp, mpg, and emissions. Heads have so much sophistication built into them.
However -
You'll read a lot about factory Magnum heads cracking, and they do. But they crack between the int and exh valve seats, which causes no water loss, and people often find this on a fine-runnign engine. It's a stress-relieving crack, not a breakage crack. IMHO, logically, the cracking is not a major concern to Joe Average. But for a 32k engine, you want 'new' heads so seach for some of hte aftermarket ones that have solved that problem. Enginequest used to be a brand for them, there might be others now. If you can find a set drilled/tapped for both Magnum and LA intake hole patterns, you have a lot more options on intake manifolds (cheaper!). (my info on heads is 10 years old, so research for yourself, there are probably more parts out there now)
For a cam -
What you get will depend on what you choose for heads, what oiling style you need, fuel pump setup, etc, but I would choose soemthign in the 260 range, nothing bigger.
Summary
I think Magnum heads, very mild cam, a 600-size carb, Magnum exh manifolds with 2-1/4" exhaust should give you an easy 50-75hp gain and possibly a few mpg if you don't drive it like a madman.
2 easier options, but with parts a little harder to find:
Do the same thing but with -302 heads from teh 88-91 'TBI era'. Those have some of the chamber/port benefits of the Magnum, but with full LA compatibility, although they have smaller valves. The 360 of that era (-308) heads is similar but with 360-sized valves/ports. I believe both give a CR boost, with teh -302 giving higher port velocity and throttle response, and hte -308 giving higher RPM flow. Both have standard 1.5 rocker ratio.
