This is the timeline that maybe will shed some light on where i am now looking.....
502 Engine Timeline - need help finding a cause before re-assembly
Noticed milky oil - engine sounded good on trailer
Took out and did half lap on water - started steaming through valve covers
Unsure if would just steam it all off, went home for oil change
Did compression check while draining oil - ZERO on # 7
Disassembled and head gasket looks ok except soot across water jacket outlines on HG
#5 and #7 were getting wet as pistons (especially 7) were steam cleaned
Took heads to machine shop - found cracks only in #1 near spark plug hole and stud @ #1
Valve guide in #7 shot - valves so loose the can touch each other and wiggle when pulled out a ways
GEN VI 502 - blind head bolt holes - no chance water came from there
Headers are wet style lightning - could be reversion? Rust water drops on #7 exhaust valve
Unknown cam specs to determine overlap (thinking reversion again)
Putting fresh aluminum heads on (old ones were iron WP Merlins)
Pictures of tear down -
https://www.dropbox.com/sh/ec7dcnx5cp417hq/AACmw1fhqAnM08EEeb3ueT6va?dl=0
Questions, I like 'em as much as pictures...

What RPM does this deal idle?
What do you have controlling water flow?
Is there a dump line anywhere?
Even a remote wild ass guess as to what the running block pressure is?
What temperature does it run (may have missed that)?
Where does your ignition timing run at idle and above 2,500RPM?
The potatoes.
Without precise control of the water volume going through the headers, you can very easily flood the exhaust with too much water. This will cause some pretty severe and constant reversion. Do you have flapper valves? You should.
I would be willing to bet your camshaft has a silly big overlap or a simply nutty exhaust duration, this will cause so many issues with a flooded exhaust. Even extending the internal collector tube will not help IMHO. To give you an idea, my '64 Chevelle when it had a 410" small block in it could suck a red rag right out of your hand and into the tail pipe at idle...

Lightnings are tricky. I personally can't stand them, but they can be made to work, and work very well.
With the engine running, the exhaust outlet (where the exhaust gasses mix with the water) really needs to be hotter than you would think. I have heard numbers anywhere from 160°F all the way to 230°F. Too cold indicates way too much water to exhaust ratio.
You can check the lobe centers with a degree wheel or a timing tape and a dial indicator. Once the exhaust valve closes (as indicated by the dial indicator on the lifter or the rocker arm), move the dial indicator to the intake valve lifter/rocker and note the degree wheel/tape reading, slowly move the crank until the intake makes even the slightest move. Bam...
There is your number. For that system to work, 108° will work with a very small duration, but if the cam is as gnarly as I am betting it is, you really need to be at 112°.. There are not very many "off the shelf" camshafts with those specifications.
If the engine temperature is low (at all times) you can really cut the amount of water to the engine down. Shoot for a WOT temp in the 120-130°F range, it should idle around 150°F tops. The idle in the water should be about 1,000-1,100. This sounds high, but it is not if the cam is large.
My marathon motors typically idles at about 1,200 and were unhappy about it. (lumpy)
Some more ignition timing at idle can help if the problem is not too severe... I suspect that this one is pretty bad.
I need to look at your pictures a little closer and I will respond again if I see something suspect.
Good luck bud.
GT