8) cp, you are getting some good advice here, but everyone is starting a bit far up the ladder. the very first thing you need to do is determine what kind of condition the engine is in. run a compression check, a vacuum check, read the plugs, etc. start at the very beginning. once you have determined that the engine is either basically sound or not, then move on to determining how much sludge is in the engine, and if you need to be aggressive in cleaning it out or not.
like evan(asa) said, what one person considers a lot of sludge, another might consider a minor amount. pictures help. after you determine how much sludge you have, you can then plan on how to clean it out. the first thing to do is change the oil and use a good synthetic with a cleaner additive like seafoam, and run the car for about 200 miles, and change the oil again, then look to see how much sludge is left at that point. i agree with not going to aggressive in cleaning out the engine as you may loosen up enough stuff to plug the pick up screen and lose an engine.
as for upgrades, the first one should be an electronic ignition system.
if the engine is in good overall condition, then i would get another head from the salvage yard, and send it to mike at classicinlines.com and have his people work their magic on it with a two barrel conversion, and mild porting. this will help you pick up probably 20-30hp, as well as picking up some efficiency, and sets up a good base for a cam swap later on.