Yes, the waterfall sound is due to air in the cooling system; You're losing coolant somewhere. When you turn the heat on on a relatively warm day, do the windows promptly fog up? Check the carpet where it sits up against the firewall for moisture in both the passenger and driver's foot wells.
I'd still like a picture of what you folks are seeing... I didn't have anything like that when my heater core went, but perhaps I just replaced it too quickly. Is the green stuff damp or sludgey?
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