[88 DL - gas and temp gauges intermittent]

I've seen a problem like this before on a different make of car, turned out to be a loose harness connector on the back of the instrument cluster. A bad ground connection from the gauges would give you exactly those symptoms.

[98 Subaru Legacy wagon is getting around 17mpg after headgasket job & ECU reset, used to get almost 29mpg]

The first place I would be looking at is your timing, both the belts and ignition... An intake leak is another possibility but you'll usually see more problems than just fuel mileage with that. Does it seem to be lacking power at all?

[Are my rear rotors cracked?]

I've seen that frequently and it's usually just like you said; car sat in one position and a little bit of surface rust caused pitting. Keep an eye on it but from the pics it looks like no problem. You'll usually feel the brake pedal pulsing if it's cracked, which is rare on a car.

[How do i lift my 85 subaru gl wagon?]

Here are some instructions for a very basic 2" lift. Some of it's a repeat of the discussion at http://www.ultimatesubaru.org/forum/topic/91636-markus56-getting-lifted/, some of it's original.