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Water in oil? :(

I own a 62 Correct Craft that is powered by an Interceptor, 312, Y block with water in the oil.....

Heres the history as I know it. The PO had the engine rebuilt a few years ago, but was only run twice at that time, for short times, due to leaking Carter YH carbs. He started to install an automotive 4bbl intake, and never got the job completed. The boat sat aprox 2 years with nothing being done. Last fall I purchased the boat and put it in storage.

I got the boat out of storage last week to start working on getting it running. I drained oil tonight to find at least 2 Qts of water come out before any oil... I had already pulled the engine to clean the bilge and do some other work. I am trying to figure out where the heck the water could have come from? Also trying to figure out the"next move"? I am thinking I should pull the pan to see the condition of bearings(maybe replace them?)_ Also thinking of pulling the heads to see what the head gaskets look like, as well as check for water in a cylinder? I also noticed the exhaust manifolds had at sometime been cracked and "JB Welded". I plan to pressure check them.

Any ideas/suggestion on what to do?
 
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