Thank you for all the replies. Answers:
So, yes, that was the gasket sitting on the block. maybe it's the wrong gasket, simple as that. I had the original copper gasket in there before, and then bought this:
"Lister CS Diesel Engine 5/1 6/1 8/1 Composite Head Gasket 10.6544" from DP Equipment, which I believe I got as a suggestion in another post.
Is that not the right kind? I agree that the water holes and the gasket don't line up perfectly, but I figured that it wouldn't impede flow. Now, if it's TOO THICK, that's another thing, and I didn't know they came in different thicknesses. Do they?
Did you do the Valves and lap them then check for leaks?
no.
Did you do the base gasket?
no. I left what was there.
Did you check the valve clearances and adjust them so they aren't hanging open when the engine is on compression?
yes.
Torque the head bolts town with a torque wrench to the correct settings?
yes.
Were the studs taken out and if so were they re seated correctly so you didn't run out of thread?
no, they weren't taken out. still have thread.
FUEL Questions: No, I don't have a sticky throttle. I've always started and stopped on regular diesel, and that's what I'm using now. But thank you for asking, as anything is possible.