It seems like a head gasket failure. If this was recently done it may have been done incorrectly. Incorrect tightening of the headbolts will cause a new gasket to fail quickly.
Something as simple as not cleaning the blind bolt holes will prevent an accurate torque reading, in the worst case scenario a bolt hole filled with oil then having a bolt tightened into it can crack the casting.
Too many people working on engines that shouldn't, sounds like you found one.
Is the block or head surface corroded? A badly corroded surface will prevent the gasket from sealing as well.
I vote to properly diagnose and repair what you have rather than start over with another unknown.
Having said this ^ I have an engine should you be interested.
Post pictures of the gasket
Take my advice, I'm not using it.
Last edited by ross1; 06-28-2011 at 06:48 AM.