Signs of rust in Engine any Ideas

Two other possibilities. Cometic gaskets require a specific machining finish to seal properly. Was the right finish performed? You mentioned the cooling system was tight. How did you confirm this? A visual inspection will not eliminate the possibility of an internal leak due to sealing or cracks. While the engine was built was it properly checked for cracks in the heads and block? The best check you can do now is to pressure check the cooling system. Did you have any signs of water in the oil? It usually shows as a milky white residue In the oil and is easy to see under the valve covers. What did the machinist tell you they checked the second time around to be sure the water will stay out?