On the dyno my engine will drops in horsepower and torque around 5000 rpm and then picks it back up.  I don't have the sheets in front of me but I think the horsepower drops off at about 280 down to 260 and then picks it back up to 328.  Wonder what would be causing this?  

A host of things could be causing this...

A loose converter, like we talked about earlier, could be "flashing" here and eliminate slippage. The engine could be down on power from a hole in the fuel curve or their could be a valvetrain resonance or separation issue. You do keep the car in 3rd gear for the entire test, don't you?  

On the dyno we shift up to the 3 gear and then when we hit 3000 rpm we start recording and at the same time we put it to the floor.  I have a new Quick Fuel carb. and a new mallery distributor.  The springs that I installed in the distributor were the ones that would give me a total advance at 2800 rpm.  I have the vaccum advance block and the best hp is at total of 40 degrees.  I haven't done anything to the carb.  

Is your 3rd gear slipping. I had a dip at4500 that moved up to 5500 as the tranny got worse. Finaly it just slipped at 4500 and went down hill from there. Tranny pressure was dropping on the 2-3 shift. Does your dyno log RPM/MPH. If it does that number should be the same from your first pull to your last. If something is slipping and gets worse as it gets hotter that number will change.  

I don't think that the 3rd gear is slipping.  The transmisson was rebuilt about 200 miles ago.  The hp levels off just a little bit and then it picks back up.  Our dyno does record RPM/MPH.