Well – here’s my two cents worth on what may be your problem. The 400 block starts life with a 4.125 bore (verses a 4.00 for a 350). You didn’t say if the block was bored but if it was, the bore would now be between 4.155 and 4.185. In any case, the head gaskets for a 400 typically are sized for a larger initial bore size and they have steam holes. The 400 block requires specific head gaskets with matching steam holes (Fel-Pro PN 17031).

The 350 heads are intended to be used on a smaller bore and they do not (in their stock form) have steam holes. 350 head gaskets do not have steam holes. Many well intended hot rodders have put 350 heads on their 400 blocks in anticipation of upping the compression ratio with the smaller chambers only to have a real disappointment in a very short time if steam holes were not drilled and proper gaskets not used.

When using heads without steam holes, the pressure immediately builds and more often than not, compromises the gasket. When that happens, water in the cylinders is common. I think you’ll find the gaskets have been compromised – as evidenced by compression being significantly lower in #2 cylinder.

I’d recommend pulling the heads, making sure you have steam holes and correct gaskets and reassembling.

Good Luck,
Glenn