Joined: Apr 2002
Location: Calgary, Alberta
There is a "secret warranty" on these 3.8L engines for the common head gasket failure. Ford will likely help you out on it. If not, you should be able to pull the heads, plane them, replace the gaskets and be back in business. I would recommend the Fel-Pro "print-o-seal" style gaskets and ARP head bolts, plus if you have a lot of miles, replace the springs while you are at it.
BTW: I would expect a compression test to reveal the problem, or if not a leak down test should reveal the problem. It's even possible that a cylinder balance test (part of the EEC-IV diagnostics) could reveal the problem, though this is iffy.
My brother-in-law had this problem with his car, and he just replaced the gaskets and was back in business.