The gear oil was more like sludge than oil. I don’t think it was ever changed or if it was not often. I do believe it has been resealed at one time as there was very little trace of water in the oil. It was black and not milky at all. I appreciate all of the input. It’s good to have other’s insight as to what might be going on. This is not the first motor I have tore down nor will it be the last I’m sure. I always seek out the obvious first when starting to work on a motor. Compression, spark and fuel. From there as we all know without the 3 working nothing else will either. I would of bought this motor even if I had checked the compression on it first because of it’s appearance. It will end up staying in my personal collection as I will never get out of it in sale for what I have into it.
OK, so the lube was black with minor traces of raw water? It is a good idea to pressure test in order to check for actual leakage issues. This gearcase uses a crazy spring loaded shock absorber in the lower driveshaft just below the gearcase upper seal/housing. This feature has a tendency to fail in a way that extends the lower driveshaft forcing it upwards so it rubs/grinds on the bottom of the upper seal housing. This condition can result in binding, or damaging/breaking the gearcase seal housing allowing water to enter the gearcase.
In your case, I am fairly confident that the stuck rings probably are the cause of the low compression. But, I will always bring up simple issues that might also be to blame. It sure sounds like your cylinder head is not true/flat, so that needs to be checked. I mentioned the plug threads because this could be an issue as well. I just want to help you avoid doing all the work of replacing the rings and reassembling, on to still have low compression on that cylinder.
And again, I would love to see pictures of your water pump pieces parts to understand what you are referring to when you say that the impeller is not the correct fit/part.
