Is my 43.L dead?

My 4.3 L sat for 16 months due to my health issues. It was winterized but not started in that time. (also I live in the San Joaquin Valley, CA, and freezing is rare) When I started it about a month ago it ran fine. I changed the oil, (no water) oil filter, points and plugs. When I started it to check for oil leaks, it purred like a kitten but when I check the oil, the level was higher then before and contained water. The kids and grandkids talked me into delaying the funeral. My investigation reveiled water in the #3 cylinder, but a compression test showed that cylinder as being the highest. (check showed 180 psi as the highest, 155 lowest) I ran the water jacket test, which I found in this forum, and I could not hear any hissing. It seemed like it was holding pressure as well. I do not want to tear into unless there is some hope of bringing it back to life. I have never done major work on an inboard motor so this is why I'm asking if this could be something other then a cracked head, block, or blown gasket. I'm willing to spend some time and money but not if it's a lost cause. I appreciate any help. I've had this boat a long time and it has never let me down before.

might be a bad exhaust manifold or even just the riser gasket (If your manifolds have removeable risers). I would start with riser removal and inspection.

I removed the exhaust manifold. Not sure what a riser is but I will attach the best picture I was able to take. I have a light coat of rust on the #3 and 5, but I'm not sure if the water getting into the cylinder caused this or vise-versa.

riser is the back part of the manifold that rises up to keep the lake out of the engine.

If your manifolds are 1 piece, with no removeable risers, you can't remove the risers. Most manifolds you can. That was just an awful idea OMC had in the late 80's/ early 90's... One of many that helped put them out of business..
And if you have no risers, you have some seriously old manifolds-(1992 was the last of those I believe - so 20+ years - they're good for 10 to 20 years in fresh water, 5 years in salt) probably due to be replaced. The replacements have the manifold as one chunk and the riser as another with a gasket between.

I have attached photos of my exhaust. Looks like I have some old ones. Can I know for sure replacing them will solve problem?

I wish I could tell you for sure for sure, but in my mind, if the pressure test of the block passed with flying colours, I think it pretty much has to be a manifold issue. The other possibility is water washing up the transom if your water shutters are missing or in poor shape - easy to inspect those with the manifolds off.
you heard no hissing, but did the pressure drop off? You might want to run that test again with a gate valve you can use to trap the compressed air in the engine and see if it holds pressure. (10 or 15 psi usually ok - no more)
This article is also good to give you confidence in spending the right money:
http://www.marinemechanic.com/site/page88.html

When you say winterized, does that mean you drained the water out of the block?

Yes, and out of the exhaust manifolds.

Then it seems like it would not be a cracked block problem. Another possible source for water in the crankcase is a problematic intake manifold. Could be cracked, loose or have a failed gasket.
I would also suspect the head gasket on that side where the rust is showing. Chevys are so dead simple you could have the head off in 20 minutes and then you'll know.

Just a thought.

Higher compression on the suspect cylinder because there is water in the rings making a better seal?

Maybe do a leak down test on 3 & 5 before you tear it down.

Gentlemen, Here id where I stand. plugging and filling the exhaust manifold with water showed no sign of a leak. I removed the thermostat and did the did the pressure test. I did not hear any hissing, even with the exhaust off, so I filled the water jacket with water instead of air. Turning the motor by hand, lead t water coming out of the #3 again. This told me that my hearing is probably shot. (At least when it comes to hearing hissing.)
I'm thinking this is a cracked head issue and I am going to check prices for a head before I do anymore. Can I use a automobile head?

I'm pretty sure OMC just used GM 4.3 truck heads.

You might want to think about your intake manifold too - it is water cooled and may have rusted through one of the coolant runners near #3.

Well, after pulling the head, it looked like the head gasket gave way. I rebuilt it and put the motor back together. I tried to fill the engine with water by cranking it with the starter. I discovered that I could not get a drop of out of the intake hose. I would think the hose pressure would push at least a little water up to the thermostat housing. The holes the muffs go over are clear, does this mean my intake pump is bad?