Bitter taste of defeat! So much coolant in the oil pan.

Just an experience I had with a similar problem !Switched from a /6 to a 340. Had everything all blinged out, only to find water in my oil, just as you did. Took it all apart, took the block back to where I had the machine work done. Final decision was that when I bolted the timing case cover on, one of the bolts had some how managed to poke a hole in the #1 cylinder ! Strange, but went ahead and had a sleeve put in the cylinder and didn't have any more troubles !!