Pieces of steel in cylinder??

That makes perfect sense! The reason I wasn’t going to use the 318 heads was because 1) the valve seat dropping out made me unsure of the rest of the seats, and 2) there was a little bit of damage to the #3 combustion chamber around the perimeter. I’ve attached a picture. Another reason I wasn’t sure about the heads was knowing how hot they got (at least the driver side) and was worried about warpage. Those reasons combined made me go in the direction of new heads.

BUT, if milling then is the way to go, then warpage wouldn’t be an issue, and I think the little bit of damage to the rim combustion chamber could possibly be corrected after a mill job. Sort of a 2-for-1.

That still leaves the valve seats. Obviously one needs to be replaced, but what to do about the others? Replacing the others won’t be cheap, but I don’t want to risk this whole scenario happening again.

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You don't know if the other seats were done the same way as the one that fell out... The others may be next... I wouldn't trust them...

Either get them redone by a competent machine guy or get another set...

I would recommend getting an old set of 66 - 67 273/318 heads with closed chambers and add 1.88" intakes and 1.60" exhaust valves with a port job, or get a set of reconditioned 302 heads to get the compression up...

Then look for a camshaft with a low/early intake center line and high lobe center to help with the dynamic compression... Earlier intake valve closing with less overlap will help increase cylinder pressure...