Well I am going to put it all back together and keep running it. No signs at all of water in oil or cylinders. Turned the engine over with a bore scope in the lifter valley and all the lifters are rotating and getting good oil flow. Rocked the crank back and forth with the bore scope in the cylinders and don't see any play in the rod bearings. Everything feels and sounds smooth turning the engine over both by hand and on the starter. I will do a compression test before I put the plugs back in. Only possibility I can think of for the slight knocking noise would potentially be piston slap. I measured the bores and pistons as well and checked them with a shim per the Rave and if anything there were still on the tight side. The bores are clean with no scaring, if anything too clean as the cross hatch pattern still looks new.

 

I don’t think you’ve found why there is coolant in your oil yet. PickleRick had a good suggestion. My D2 had a bad timing cover gasket letting coolant into the oil.

 

as I said above, there is no coolant in the oil.

 

I hope you’re right. The photos of the valve covers look like there is.

 

also explained above as to what it was.

 

Buttoned everything back up and did a fresh oil change. I've come to the conclusion that what ever the noise may be, it's not hurting anything at least on the top end. I'll monitor the coolant loss but it is either still working air out, or it's leaking externally and evaporating. It could use new radiator hoses I'm sure and I may purchase a new coolant cap. Thanks for all the suggestions.

 

A pressure test would help you find the leak(s)

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After head work or heater core replacement I've never had to add water more than once or twice when bled properly, never more than an inch or so below the fill line.