That's a cracked block or head. Ask me how I know...
I ran a couple poker runs with about an extra gallon of water in the engines. Didn't hurt anything just made a mess. I pulled engine and block was cracked. I did have moisture in that engine for years, always assuming it was condensation. It finally went.
https://cimg8.ibsrv.net/gimg/www.off...30d25e737c.jpg

https://cimg1.ibsrv.net/gimg/www.off...00600bdef4.jpg

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Going to pull the trigger today on some aluminum heads and a new block. Not my plan for mid summer but want to enjoy some summer on Tahoe this year. Planning on a Crane 651 cam unless someone has something better to suggest for a 540?

What aluminum heads are you looking at getting?

What if you just get a used runner to drop in there for the time being? An underpowered pig is lots faster and funner than a rowboat. And then time pressure is off for doing this 540 right. Plus, block should be fitted to the pistons, not bought standard and thrown together.

I am ordering new pistons as I don't have any 4.500 size. I am ordering the Merlin IV block with a 4.95 bore so the machinist can fit the new pistons. Not sure on heads yet, I have a set of BB2 xtra CNC with jesel shaft rockers I was saving for my jet boat engine project but they may have to go on this. Was looking at a set of the bare ProMaxx so I could just move all of my current head components too as they are still pretty new. Anyone ever use the Sniper heads from PBM?

I have been looking for a drop in or a short block but not too many choices close to me right now.

Who's your machinist? I know a top notch guy in Sparks that did a 389 tri-power Pontiac for me years ago but I can't recall his name right now. Good guy and did top notch work.

Just found it.............Augie Steinert..........Superior Machine

I went and spoke to him last month to check my block and heads and he said he doesn't work on boat motors or performance stuff and truthfully was a total *******. I have heard good things about his work though. I ended up going to another machine shop in Reno and the guy who owns this shop is older and he actually employed and trained Auggie. He also has a great attitude LOL. I also use another guy locally that worked at EPD heads during their ProStock heyday and he is really good on head work.

ok, rookies pressure tester pics are basically what i did but i used wood instead. you can use a water pump but a crossover is better. i made a T hose with a tire valve and a pressure gauge on it that fit the small hose fitting on the crossover. pressure testing with intake off lets you get in there with soap and look for bubbles. i held the wood under the intake and drilled the holes thru the intake to get angle right. stacked a few pennies under the low side of the washers under the bolts to get the bolts to clamp down good. man i wish i could post pics...