I have a 95 contour gl 2.0 has water in the oil (oil is brown and milky)
so I fugured must be blown head gasket. Took off head and gasket appears to be ok. Where else could water and oil mix? The head is not cracked, cant tell for sure but the block appears to be ok. The strange thing is the is alot of sludge(oil water mix, extra milky) in the passage ( I assumed it was a coolant passage) into the intake manifold. Any help is appreciated.

sounds like a blown headgasket to me. Id go ahead and replace the gasket since you already have it off anyways.