A buddy of mine was telling me that puting 305 heads on a 350 increaces compression and hp. Is the true and how will this effect performance?  

Most 305 heads have around 56-63cc combustion chambers. Obviously this will increase compression ratio significantly over an old open chamber head (usually 76cc) or slightly increase compression over a closed chamber or vortec head (usually around 64cc).

Usually, 305 heads have smaller port volumes and intake valve sizes than a 350 head - this hinders performance. It's the same with the closed chamber versus open chamber big block Chevy head - "breathing" potential is harder to come by than compression. A well-prepped dome can increase compression by leaps and bounds without adversely affecting power whereas if the intake port is restrictive there is very little you can do. So, I never recommend 305 heads for a performance enthusiast.

Some disagree but this should only be for someone that couldn't care less about power and are building dirt-cheap junkyard motors that will never see a track or dyno.  

Thanks for the warning.