Ok, oil is getting out, probably front seal. Water is getting in, could be anywhere, pressure test will reveal that. The questions are... How long was the water in the drive before you realised it? Was the drive trimmed up? That water, salt or fresh?
Possibly the water was there long enough (and it doesn't have to be long) to pit the bearing and/or gear surfaces...
First thing I would be doing is o drain out all the oil and flush the drive, possible with diesel to try to remove the water... Then see it you can get enough air to stay in the drive to find where the water is coming in... If the seal in the top is leaking too much to find it, split the drive, seal up the oil passage next to the water pump and pressure up the lower, see if you can find a leak. As it's water getting in, and a pressure test may not find the leak, also do a vacuum test.
Chris.........
