Offshoreonly.com - 1978 Superboat Project Help

I recently purchased a 1978 Superboat which I want to set up to use at Lake Cumberland and do the Catalina ski race. I bought it not running with its engine with water in it. The boat has no rot and the interior is okay.
Here is what I know.
Engine: Owner said was supposed to have 560 HP, when I look at the block serial number it is a 454 and does not have Merc numbers stamped on it although all accessories are merc. Maybe was a rebuild. I started getting the engine ready to pull and found lots of water in the cylinders when I removed the Imco manifolds on both sides. The owner was not on the boat and had lent it to a friend who reported that overheat alarms went off then the engine cut out. By the looks of what I found I think that it is likely that the long block is trashed. Maybe can salvage crank. Wierd that it was full of water on both sides?
I think that I would like to build 500 HP NA. Will a 502/540 work with my TRS set up(flywheel bellhousing, etc?) I was thinking about trying to find a 454/502 Mag takeout and build it with some better aluminum heads,
Drive: The boat has a TRS setup with a Merc 2 transmission with electric shift. Was supposedly working when the boat failed. When I pulled the drive a lot of rusty fluid was in the bellows but the drive fluid looked ok. the lower has a nose cone. The transom assembly feels tight except there is a bolt that goes all the way across the case in the upper swivel pin area.
I dont know at this point if I should consider refit with a Bravo style drive or stay with the TRS?
I would like to add external hydraulic steering and some K planes(It has the Bennet tabs)
I want to do this not spending a ton of money but I dont mind spending some on it. What does everyone think.