How about dropping the oil pan, refilling the cooling system with water, then use a pressure tester to pressurize the cooling system. You may be able to see where the coolant/water is coming from.

I dont have chance to get my hands on pressure tester, but there is small chance that my friend has a leak down tester. That would pinpoint excactly where the problem is, right?

I dont have chance to get my hands on pressure tester, but there is small chance that my friend has a leak down tester. That would pinpoint excactly where the problem is, right?

Maybe make one...get a rad cap, drill a hole, hook up barbed fitting for compressed air.

http://www.instructables.com/id/Make-an-Auto-Radiator-Pressure-Tester/

Well i removed the head, not a biggie (thanks to you guys) and i still dont understand. My head gasket looks okay but there is small amount of coolant/oil in every cylinder. Could this good looking gasket fail be that utterly bad? Please help, i want to get my babe on the road... weather is getting warmer and warmer as we speak....

Is there any chance there is corrosion in the block or head that has allowed the oil & coolant to mix?

I guess everything is possible, but i dont see clear signs of corrosion in neither. Its a CA car, so it has very little corrosion anywhere. Im taking head to machine shop, just to make sure its solid one. Im out of ideas so i just put new head gasket and hope for the best.

The corrosion I'm referring to would be inside the engine, so it wouldn't matter where it was from. It would be more like how it was treated. Not using the proper coolant mixture could lead to corrosion inside the coolant passages. Overheating could cause warping of the head/block to the point where the head gasket wouldn't seal. Improper torquing of the head could result in an improper seal as well.

I cannot figure any other reason than loose bolts. They were tight but i suppose not tight enough, even they were torqued to factory specs. Head was okay and so were the valves, according to machine shop. As mentioned before, head was machined less than 2 years ago and i have drive with no problems.

Misfortune continues, most likely my cam tensioner has slipped as i cannot lift sprocket back on place..i even tried to align it with engine jack but the whole front end rises.. I have engine @tdc and front pulley is tight on place.. How the heck I remove it if I want to get timing cover off..?

Got the tensioner and sprocket on place. After that i shortly believed everything is going well. Except its not. I did pressure test again, just to see that cyl 2 gives same readings + extra bonus: now number 3 gives as low numbers as well!!! Have i lost 2 piston rings in one week??! ARGH.

I don't think your rings are damaged, not enough oil on the cylinder walls will give lower readings on compression test. Since your block was full of coolant.

Build everything back together with new gaskets, and fill the system with coolant, that's the only way to test it. It might have been your head gasket like you say.

Any chance you have a head bolt or two bottoming out? Torque wrench working incorrectly? Dry bolt threads giving high torque wrench readings? Warped head?