[Capri306]

I'll throw in a vote for Permatex #2 non-hardening sealant. I have personally used that sealant since I was 15 and have NEVER had a leak when using it. Ever.

Having said that, if the threads aren't leaking and you're sure the heads are solid (flat and crack-free), that pretty much leaves the block to be the culprit. You can absolutely machine a deck surface or cylinder head too much! I have many possibilities of the source of the problem floating around my head right now, but I believe it's the machining that can make or break a seal.

Going back to the possibility of a bad block, I'm thinking that if the deck and/or the cylinder walls are machined too thin, the heat from the engine will cause thermal expansion of the relatively thin metal and start to push up on the cylinder head, causing a leak. Just a thought.

Does it ONLY leak when the engine it up to operating temperature and the coolant is under pressure? I'm wondering if it's temperature or pressure dependent, as that may eliminate a few possibilities.