Hit it. There are a couple companies doing replacement body panels. If they interior is trashed, that'* a problem, but you can always do a full-on track car, in which case you wouldn't need most of it anyway.
These little cars were decently quick, excellent in the twisties, and with a little work, you can turn it into a real beast.
If you decide to go in a direction other than full resto, take a look at the Trans America racing series cars. The Trans Am car were really evil looking....

Sounds like a decent deal, though to me that is hands down the ugliest generation of Mustang ever built. I do kind of like the Cobra II though.

My friend has a 78 Mustang II 2+2 ralleye with a 302 and four on the floor and t-tops to boot. The car is faster than you think and it turns on a dime. The car is pretty light and is actually shorter than a fox body! And just a note, not all of the cobra II'* came with a v8, in fact most of them had the 6cyl.

I say buy it. Even if it is pretty rusted, for $500 you can drive it until it falls apart then sell the engine and trans and make most of your money back.

BUT...all King Cobras DID have the 302. We still do not know what trim level it is. For all we know, it could have had a V8 transplant done in the past.

There is no doubt they can be made to go fast now. I bet now someone has managed to massage in the 4.6L modular V8. But it wont be too fast if it has the original motor, exhaust, and emissions equipment still on it. The two biggest power-suckers on any car of that era are the cat converter (back then, there were two types. One was a monolithic type, like what is still used today. The other was catalyst-covered beads that was a joke), and the AIR pump, which usually seized after a few hundered miles.

Carbs and vaccuum lines are no fun either.