The next step would be checking to see if the cams and distributor are in sync with the crankshaft. With the cam cover off and the spark plugs out rotate the engine (clockwise as you are standing at the front of the car facing the engine) using a socket on the big nut on the harmonic balancer until the timing mark (triangle) on the toothed timing ring aligns with the pointer - this is top dead center for the #1 piston. Then check to see if the notches in the two camshafts are pointing ‘straight up’ (perpindicular to the plane of the head). Pop the distributor cap off (two clips) and check to make sure the rotor is pointing at the notch in the edge of the distributor body. Grooveman recently replaced a blown head gasket and there is some relevant discussion and pictures that will better explain all of this in this thread: Water in the oil 1989 XJ40.... ouch!.