Howdy Back OakR and All;
"Current setup is stock 1966 Mustang 200 with a 1940 carb with a DUI."
A- First, which 1940 are you using? Does it have a Spark Control Valve (SCV)? Which DUI are you using? If the carb has a SCV it is sending a mismatch vacuum signal to the DUI distributor. Which carb and distributor are you using?
"My plan is to install a Weber 38, low profile air cleaner, cable throttle, 1978 250 head, 264 cam, double timing chain."
A- That is a good plan for a basic street driver type engine. What transmission? You will need to add an increase in compression ratio for that cam. The '78 head is a good one to do a direct mount on the Weber carb. If you are going with a carb adapter be sure to check to added height and hood clearance.
"I would like to do it in 2 stages. 1) carb 2) cam and timing chain, if need be 3) head."
A- 1) is ok, unless you want to direct mount the carb- no adapter. if that is the case, the new head would likely come first.
The cam and cam timing gear change should come while the head is off. The head will need to be off to facilitate cam installation.
"How does that setup work?"
A- As long as the short block is in good shape.That's where the compression tests Econoline suggested come in. I'd do the compression tests first. If you get good cylinder pressures and seal go ahead with the rest. If the short block is weak you will likely be dissapointed.
"Would I be able to drive after stage one? Weber 38, no cam upgrade."
A- Yes.
What transmission and rear gear are you using?
Keep it coming. Planning, assessing what you have and planning accordingly will save you money, time and heart ache in the end. So, for now, go ahead with the carb upgrade and start searching for a '78 and later head to prep it to go on when you do the cam install.
Adios, David