Gday Mike,
Seeing what you see, I, personally, wouldnt be trying to start it up at all.
If I ever found something like what you describe, I would be stripping it down, or at the least, removing the cylinder heads and go from there.
Sounds like the engine is ripe for a total rebuild, including boring out, larger pistons, plus whatever else has been damaged by water, and or age.
Bruce,
The Tassie Devil(le),
60 CDV