Yeah, that's it! That's the ticket!
I guess I wasn't clear in my first post. It wasn't my intent to blame anybody or anything (except my own ignorance) for the pitting. I only mentioned that it's Aldo's steel to get the "mystery metal" question out of the way.
After reading all the comments, I think the answer is two parts:
1) Use something better than Tandy's tooling leather and prep the sheath with mink oil or wax before using it. I could use recommendations for both leather and conditioner.
2) Don't get in such a damn hurry. I
knew that sheath wasn't dry, but I thought "It's just oil" and I really really wanted to show off to the Saturday Scrabble crowd.
Thanks again to everyone who took the time to answer.
Doc