[nkaminar]

I second what JayJay said about seeing water jackets that were in much worse shape. You could put it back together without doing anything to the water jacket. But if you want it spotless use the EvapoRust, since you already have it. It will dissolve the rust but not touch the cast iron. It is not toxic and non polluting so it can be dumped on the grass. Block the drain and let it sit overnight or 24 hours then flush with a garden hose. The acid has a chance of eating some of the cast iron that is not rusted.

A perfectionist (OCD) would redo the valves but if the engine was running fine except for the water leakage I would be inclined to put it back together as is. Use the copper spray gasket sealer but use the Best brand graphite gasket. Follow the torque specification and re torque as recommended. I use anti seize on the studs and just hand tighten them after cleaning up the threads in the block. If any are leaking use a gasket sealer like the non-hardening Permatex.