Dave,
It may sound stupid, but I find it's at least a relief to have the mystery solved! Or, somewhat solved . . .
In my mind, you've got a little bit of time and money invested in this engine already, and head gaskets are pretty cheap. Only you know your patience and persistence level, but I think I'd be pulling the head on this 216 and seeing what you see. The great thing is, you don't have much to lose, mistakes don't matter so much, and the potential for vast improvement is great!
Make a deal with yourself, though, that you won't succumb immediately to mission-creep, especially when you find the cylinders scored and lined with rust, etc. etc. Just do what's necessary to get it to run! Verify that indeed you have a blown gasket, and find out what's with #2. Put on a new gasket, fix whatever burnt valves there are, but that's it. Then, throw it back together, and hear it run.
Once it's run a while, the compression will likely come up on all cylinders, as the rings loosen up. I'd put some snake oil in the crank case to help clean things out (opinions vary on what to use - I'm a fan of Marvel Mystery oil, but I don't think it matters much). Then run it a little while, drain the oil, put in clean oil, and drive it some!
You can decide to change the engine later, but I say let's find out how this one really is.
S'what I would do, anyway . . .
-Michael
