You can spend your budget nicely by doing roughly the following:
Read Trog's thread : "My PMO ITB Project"
http://forums.pelicanparts.com/showthread.php?t=427451
then one-up that by going to a ...
3.4 High-Compression 10.3:1 ITB motor with 993 exhaust
Recipe:
-Start w/ a 3.2 Base, add ARP rod bolts and 98mm pistons and cylinders, hot cams, twin plug the heads, and change to ITBs, add 993 heat exchangers (could even plumb a cat in there)
Result should be 300 or more hp, excellent reliability, perfect throttle response. It will be good to keep it under 7k rpm's.