Re: Is motor shot?
The water INSIDE the lower unit is a problem. If you monitor it, you can keep changing it to keep the oil clean. The better solution is to reseal the unit. Not a difficult job - lots of posts here on the boards regarding the how-to end of it. A manual is a must, too...
As for the water pumping, do you know when the impeller was last changed? If it's been more than four years, or you don't know when at all, change it while you've got the lower unit apart (if not before!). Perhaps change out the waterpump now, and do the seals after you call it a season...
As for the oil in the water, as mentioned, you may be able to limit that by finer adjustments of the carb mixture knobs...
- Scott