Update;
Finally got the gaskets and got the front of the engine put back together. Just to make sure I was back to square one, I cranked it over, nothing. Pulled #4 sparkplug wire off, tried to start. Move the dist a little bit, started. Let it run just a little bit with just a little coolant in it, put the wire back on, smoothed out. Turned it off, tried to crank it, nothing. So I was back where I was before.
So I turned my attention to the distributor. Pulled everything loose, pulled it out of there. I would like to shoot the guy who designed the intake to hang over the distributor hold down bolt so you can't get a long extension on it.
Distributor is slam wore out. Another Cardone mess. I have wasted more money on these Cardone distributors than I would care to admit. Time for a rebuild, but I can't find any parts. It needs a new bushing for the main shaft. I checked the old TFI 2.8 distributor, tight as a drum. Check an old 2.9 distributor I had gutted out, that is tight also, no play. So the first thing I thought I could do is carefully push the bushing out of the 2.9 dist and put it in my wore out dist. Shaft is different size!
I have been going round and round doing research. I am finding on the 5.0 mustang forums some of them are converting to carb and running the TFI dist with locked timing. I thought that broke all the rules, but some were doing it. My 2.8 TFI dist is in really good shape bushing wise, So I decided to try it. Stabbed it in place, hooked the TFI module up with 3 wires, put everything back together, and it fired right up. I adjusted the timing to about 25 BTDC and took it for a spin. Seems to have the same power as it did before. And I restarted it hot and it cranked right over.
So I am going to live with it for now, at least it's running. I hopefully have time now to do some more figuring as to a permanent solution. And at least now I know it was the other distributor causing the problem.