Well thanks guys - I have to admit I felt silly sending back a new engine with such a slight amount of contact, but I agree, the rod simply should not be rubbing on the crank case.

The rod appears to be in great shape; not bent, nice snug fit with the shaft. The noise is definitely from the old bearing, which has quite a big of play in it. The noise stops with the new bearing, though contact remains. Using 10% nitro fuel with 20% lubricant, 18% synthetic/2% castor. Top RPM achieved was 9000, though only for a flight or two then switched props and got 8000.

As far as bearings go, Boca was going to send me the high speed steel bearing, open at both ends, which is what's in the engine originally. Some top pattern contenders told me they all go bad after a hundred flights or so, and that most guys running OS 120-160 engines in pattern go with the stainless Boca bearings, and get 300+ flights out of them. My front (stock) bearing is covered - don't know the difference between sealed and shielded - it has red plastic or rubber covers over the balls. The original rear bearing was completely open, the new one has blue rubber or plastic covering, again as recommended by talented and experienced pattern pilots and an OS rep.

If I get a new engine or new bearing, I'll keep the bearing in it until it goes bad - we'll see what happens. After 30 flights the bearing is discolored, making noise, and wobbly, and I use after run and take care of my engines.