Water....
When I read your first post, I thought of the possibility of the moisture that remained in your crank and the ambient water temperature from a warm engine, that it started to rust and seize. This is not un-common and can happen fairly easily. The idea is to catch it early and pull your plugs, put a lubricant in like, WD or Marvel Mystery oil (which in my book is the best in this situation) to help free the parts that are starting to stick.
I don't see any real reason to go any further into the motor than you already have. The engine has oil in two areas, the balance shaft has about 1 ounce of SAE 30 in it and the rotary chamber is submerged by the 2-cycle oil from your tank. This is why we say to those going to premix, that you have to leave that tank and the lines going to the connections in the center of your casing intact.
Other than that, there is no more oil in your engine. It uses oil that is mixed with the fuel to lubricate the rotary plate at the intake all the way through the crank, pistons, and connecting rods.
The water enters the engine like you described, but it makes it's way across the top of the head, as you've seen the divider inside the plate, over to the exhaust, where it circles up and through the exhaust manifold, being preheated by the exhaust gases before entering the block. Going through the casing water jacket then back up through the top of the plate over your head and out again through the nipple in the head plate, next to the inlet. Your "tell-tale" is at the upper most point of the water flow to vent any remaining air and to let you know, water flow has been established.
Your spotting the "O" ring at your cylinder head plate could very well be your culprit, the white corrsion looking stuff must be cleaned throughly and dont' use a screwdriver, it may gouge the aluminum. Use wood or some other soft metal alloy. Something softer than aluminum. I use pieces of wood that I slice up with my table saw. But what also concerns me is, if your attaching your water hose to it and turning it on, you do have a bleed off on your pwc also, correct? You cannot apply the 60 psi or so coming from your water hose without having a bleed.
It may be a good idea if you haven't already done it, to go to my thread, "a look inside a 787". There are some detailed pictures over there that may give you some info that you can use.
And when you come back in from riding, it may not be such a bad idea to pop your plugs out and put a half ounce or so of 2-cycle oil in through the top of the heads, let it sit a few minutes, then roll the engine over with the plugs still out. Put a rag over the holes so as not to blow any excess oil out and over everthing.
I know its a long reply, but most in this forum have gotten use to my long explanations. Sometimes, I think a vivid description is the best way to make sure you see in your head, what is being discussed.
