1- Drain the engine of water, remove the fresh water supply hose going to the engine, cap all other water passages, then test from where the fresh water hose connects to the engine to see if the block will hold pressure. 15PSI should do, and I suspect that you'll find the pressure dropping from a crack somewhere. Pic #2 shows a big grey splotch on the block which looks like JBweld to me... If the block is loosing pressure, listen for where it's hissing.
2- Check the manifold for cracks by filling the water jacket with acetone, then looking for acetone leaking out. With the rust marks in the head's intake runners, I would be very suspect of a cracked manifold. (or water got in through the carb).
If the block and manifold pass the pressure tests, install the manifold, change the oil and filter to get the milky oil out, then get the engine running ASAP to get remnant water out of the engine. Check for milky oil, some is to be expected with the prior contamination, but it shouldn't be bad or get worse the longer then engine is run.
For the trim pump, drain the reservoir, pull the hoses off the manifold under the gimble housing and manually lift/lower the drive to get the milky oil out of the trim rams. Reconnect everything, refill and run the trim up/down while checking the trim fluid level. Repeat drain/fill procedure until the trim fluid comes out perfectly clean. (My trim pump had water contamination which left a sticky/waxy layer of gunk over everything, had to tear the pump apart to clean it out.) Once the boat is in the water, check for milky trim fluid after the first couple of trips.
I would also drain the drive to see if it has water contamination.... And change the water pump impeller.
