Issues Passing SMOG

Well if you have a low compression one cylinder you have found a problem that needs looking into.

There are obviously various things that cause low compression and since all the others cylinders have good compression, general wear of the bores is unlikely to be the broblem, most likely something is broken around cyl 1.

The Rover V8 started as a Buick 215 engine and then was adopted by Rover as a quick fix for the dated and underpowered engine range in the 60-70. Rover persevered with the design and gradually increased the boresize to increase the power, they kept the design going till 2005 or something in the D2 and P38 RR. It is widely known that at some point this bore increase exposed weaknesses with the steel liner in the aluminium block. The liner can crack or become loose in the block. All of it is bad as generally there is no fix for this other than fit a new block. Yes there are signs that this is the cause, but then there are the stories of there being no signs. Typically however you would see some interaction with the cooling system (pressurizing). Taking the head off, blocking the cooling water openings and pressuring the cooling system with air would show any liner cracks with soapy water. The internet has plenty examples of this issue and the process.

Alternatively something has gone wrong with the rings or a valve might have burnt out. Typically you can troubleshoot further with some basic techniques such as: add some oil in the cylinder and if pressure goes up, your rings are leaking (temporarily less so dt the oil). Solution would be to change rings or piston after checking bore for damage. You can pressurize the cylinder with air and listen for air leaking through the valves (leakdown test). If the head gasket leaks you would see the air pressure migrate out to the side of the block or adjacent piston. In your case Cylinder 1 is far removed from the water channel so you would not see a pressuring of the cooling system.

I just restored a 3.5, which is the most solid design (smallest bore, but also the least powerful). I received the car with one head removed 20 year earlier. So the chances that somebody had abandoned a no hoper cracked block were great. There were wooden blocks securing the pistons on the open side indicating somebody had done a leak test on the opposite side (block to stop the crank from turning when air was applied). Upon removing the other side I found the exhaust valve on nr 6 was burnt out (piece missing). So they removed the wrong head (poor trouble shooting) and the fix was relatively simple. So far the engine has been running fine for about 300miles..

Yes this is a tricky situation:

1) you remove one head, so while you dismantled halve the top end of your motor maybe remove the other side as well.
2) New headgaskets, probably best to have the head skimmed. Lets hope they do that without insisting a a head rebuild. I suggest you refit with studs instead of bolts.
3) Now you drop the sump and open the big end on cylinder 1 and push that piston out (up). You see some wear on the bearing surface. Bearings are cheap, you might as well change that. Now you want to do them all.
5) You open a main bearing while you are there: some signs of wear so you change them as well (possible in situ, but a little fiddly). So that is the bottom end sorted.
4) Obviously you pull all pistons at this point.
5) You had to do something with the rings on piston 1 (assuming bore is not damaged). All pistons are out so, change all the rings.
6) Might as well give the bores a quick hone
7) We are assuming your cam shafts and followers are fine.

Ok so you can source another motor and swap ($), maybe more power if you like that (in a RRC?), but how is that motor going to be compared to your (overhauled) original engine?

You are in at the deep end now. Most people here are in the deep end, spending too much money on a car that is not really worth it commercially speaking. You can buy a good LR3 for $6-8k and drive it, lots of power, very capable and very comfortable. You have to like the RRC enough to endure the challenges.