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Re: Water in oil pan
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The only way to determine if the block or head are cracked is to strip them down, have it " tanked" to remove the rust & carbon, have them both magnfluxed & pressure tested. You will usually find minor cracks in both, only the machine shop can help you determine if they need to be repaired, or will be fine as is.
If your pockets aren't very deep, I would try new sleeves and pistons, put them in & pressure test the coolant system with the pan, manifold, and valve cover off, place a piece of clean cardboard underneath and see what you have the next morning. If no leaks after 8 -12 hours of being under pressure, you should be good to go.
The water was probably built up condensation from sitting outside those years, they will build up condesation even sitting in an enclosed shed.
Strictly a guess......
How much water was present in the oil pan when you removed it ?
Was the radiator half full or empty?
How much is in the rear end & tranny?
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