To my knowledge (had several MD2 engines), there is not water passage that
would allow the water to get into the oil.

However, that stated; there are two possible causes that I can think of.

1. The water pump is mounted on the crank case and there could be leaking
pump seals. Actually that would mean that both seals are leaking and the
weep hole is plugged.

2. The is a very remote possibility that the water passage between the head
and the cylinder has a "leak-over" via a bad head gasket. This would mean
that the water is finding it's way to the oil drain back passage where the
push rods come up from the cam.

Frankly, I think #1 is your source of water or it is due to condensation
that is acculating in the crank case. (I have had this problem in my Entec
gen set due to the alum. crankcase and infrequent useage.)

If you need the manuals for this engine (owners or shop manual) I have them
on my web site at http://hood.hctc.com/~esteve/private/manuals/


--
My opinion and experience. FWIW

Steve
s/v Good Intentions