I have a 96 Mark VIII with 135,000 miles on it, I'm going to buy a new car next year but I'm going to keep the Mark VIII and make it a project car.I want to start with the engine. Here is my question. Should I build the engine that is in the car or is there a better option ie; mustang engine. I'm not looking to get the car into the 9s or anything like that, just a mild street car. or a little bit more.

First, you already have the best block out there. No need for anything else. Second, I would keep the crank, but buy a set of good I beam rods and light weight pistons with a set of Total seal rings. Also, use a standard oil control ring. The B heads are good, you could send them to Total Engine Airflow, for a port/polish/valve grind. I would also consider upping the compression to 10/10.25 to 1. You can keep the stock intake, but have it ported and polished. If you decide on using the 96-98 Cobra intake, you will need to find a set of C heads.
Since you have so many miles on the car, I would recommend a trans rebuild/driveshaft replacement/rear centersection rebuild. Of course, the best thing for the MKVIII would be a set of 3.55 or 3.73 gears for a little more pull. OH, and don't forget to really clean the IMRC plates, while you have the engine apart.

Edit: Almost forgot, good time to upgrade the water pump to either a cobra or aviator pump.

Im not sure how good the cranks are but the block you have is great. Why not look into having a place liek VT engines build you a monster motor?

It all comes down to cost. The advice above is great, you do have a great foundation in the car that you can build up from and its would be a great experience to build something.

On the other hand you could get a newer engine and build from that, or at least get newer heads.

If I had the funds and choice, I would rebuild to my spec. Any build can out due stock. But if you just want something better and want to save cost and time you could fine an 03/04 engine, do some intake and exhaust work with a tune and I bet you would be happy.

If you decide on using the 96-98 Cobra intake, you will need to find a set of C heads.

No.

96-98 Cobras used the B heads. The 96-98 Cobra intake is a direct bolt-on to our B heads. You will need a new Fuel Rail, IIRC. I am not 100% about the fuel rail as I'm using a 96-98.5 Cobra rail made by Aeromotive.

Correct Frogman, It was early in the morning, I don't what I was thinking. Prolly the 99/01 cobra intake that needs the C head.

Yup.

Thanks guys this is exactly the information I was looking for. Like I said in the post I don't what to go too wild with the car just some cost effective inprovements. hmmmm I can always use the kids college money. On second thought I will let them go to college. Get them out of the house quicker.

Don't count on it!!! LOL

Or you could just do the 96-98 cobra manifold and then get a progharger kit and run 8lbs of boost, That way you can maybe save some money for the drivetrain. That should get you around the 400hp range which is damn good for your cars, good luck with the project.