You already have a thread about this subject.
http://www.stangnet.com/mustang-forums/815751-2nd-head-gasket-3rd.html
Here's what you need to know:
1. No, water and oil CAN'T mix if the lower head bolts are not sealed properly.
2. Yes, the lower head bolts MUST be sealed. (moly lube is not enough)
3. No, teflon tape is NOT an acceptable sealant to use on them.
4. Most commonly used sealers: permatex or a hard setting thread sealant.
5. Yes, you can take one lower bolt out at a time and re-torque it after applying the proper thread sealant.
6. When you drain your coolant to remove and seal the head bolts, you will not be able to drain what is in the block by simply removing the lower radiator hose or opening the radiator drain... you will have to remove one of the head bolts and use a turkey baster or siphon to suck the extra coolant out of the block so the level is below the lower row of head bolts. This is to make sure the coolant doesn't keep the thread sealant from sealing.
If you have water and oil mixing, the most common reasons are:
1. Blown head gaskets (warped head or block deck)
2. Improperly sealed lower intake gaskets (gaskets can shift during installation or a warped intake)
Hope this is clear enough.