95 Merc 25 exhaust and cooling issue

[kingpin]

Hoping some one can help. I just bought a 1995 Mercury 25hp in non running condition. It would not start due to a plugged fuel line. Got it running while in a barrel of water and notice it wasn't peeing. Also noticed it gurgling exhaust out of the water intake screens. It's been along time since I worked on a 2 cycle boat motor. I'm mechanical and can change out the impeller but I'm curious as to what is causing the exhaust to come out of the water intake. Compression is 120 on both cylinders and the motor seems to run fine for the short time I ran it.Thanks in advance.

[kingpin]

update

I dropped the lower unit today to check the impeller. It was shot. I also found the top of the lower unit covered in oil and gunk. The copper tube came out with the lower unit. It too was covered in oil and gunk. I pulled the thermostat and looked into the water jackets. Dry as a bone. No oil residue. At the base of the powerhead in the bottom cowling, there is some il sitting there. I'm not going to be using this motor until Spring. I'm thinking I will turn it into a winter project of sorts. Do you think maybe the seal at the top of the water tube along with the powerhead base gasket are worth replacing. My big concern is that I have no idea how hot this motor got before I got it. It has good compression on both cylinders and it started and ran good for the short time I ran it. Your thoughts please.

[boats.net]

If this is a oil injected model then check oil injection system for oil leaks, if it's a pre-mix model then may have too much oil gas.
If engine did get hot then may need to replace water tube grommets.