Wanted to update this thread, even though I've started several others in this saga.
I ended up having the engine torn down and re-assembled in order to find the source of the mystery water and here's what we found. This is the cylinder sleeve from #2 after it was removed from the block. Apparently the sleeve had rusted from the back side, where the original crack in the block was allowing coolant against it. Over time it got thin enough that it became porus and opened pin holes in the surface. Under heat and pressure, it was enough to flow coolant into the cylinder. Apparently these type of issues don't show up easily on a magna-flux. The holes appear much bigger in the photo as the sleeve was bored out and made the holes open up.
In addition, found that the rocker shaft on this side had developed a crack. So, had I kept running I was in for bigger problems sooner rather than later. Builder said it was probably due to not having end stands on the rocker shaft as I was running the original Ford pedestals that leave the end rocker arms hanging off the end of the shaft.
So, now it's all back together and had it running today with new rings, new sleeve on #2, new rocker shaft and new end stands on both rocker shafts. Also got my rear breather working as they added a valley pan modified to work with hydraulic lifters, while keeping the splash off the rear breather.
I also have the TKO 600 installed with the short input shaft and no spacer, which was the thing that started this adventure last December. Wow, can't believe I've been fighting this for almost a year now.
In any case, it's been a real learning experience - good, bad and ugly!
