water in lower unit

I noticed the drain plug on the lower unit was leaking. When i drained the oil there was water in the lower unit. Is it safe to say the water entered through drain plug?

I would say that your water came in from the loose drain plug. I would double check the unit by pressure testing it before using it though.

Check the drain plug and the vent plug to see if the "O" rings are good. If the O rings are good and the plug was tight, you may have a seal going out of the lower unit. Try the o rings first, and tight is tight and no more. Run it for a couple trips on the water and recheck it befoe you go any deeper into a repair.