Lug,
That must be a pretty serious leak
Did they put seats in the heads ? That is the only other thing I can think of. If they put exhaust seats in and cut too far and hit water, but even that usually does not leak that bad. Sounds like you have checked everything else there is to check !
One thing for sure, take a shop vac and get all the water out of the cylinders, it does not take long at all for them to start rusting when they are freshly machined
Bill Koustenis
Advanced Automotive Machine
Waldorf MD