Best way to paint engine?

I used automotive paint and a spray gun on mine. It's holding up just fine so far. If you're using spray paint, get some of the high temp stuff.

As for prepping it, take a wire brush to any rust you may have. Make sure the engine is as clean as possible, and wipe it down with some paint thinner right before you spray it.
 
POR-15 makes a really good engine paint. I bought their engine paint kit which comes with metal prep, degreaser, cleaner, paint, etc for around $35 or so. It really holds up too. I used Ford classic red. Here is a pic...
 

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