I've been given this bike recently and I know for a fact that it ran a year ago. I'm decently new to motorcycle repair, the only other bike I've worked on was a 70 Honda Ct70.
I wasn't getting any spark out of it so I took off the flywheel cover and water came out, which I honestly don't know where the water came from. I took the flywheel off and cleaned the rust off the magnets, the stator coils and the condenser looked pristine (well compared to what they looked like on my honda) I didn't see any shorts. I left it to dry off a couple days, and went to try it today and only got one good spark out of it.
I took the oil pump cover and water came out of that also. My only guess is the water came from the air filter and made its way in?
Honestly I don't know how these 2 strokes work really.
Also I noticed while turning over the bike with a drill without the spark plug in, vapor comes out the plug hole I thought it was gas but is there a chance this is water? 
and finally the clutch doesn't grab at all I tried moving the screw by the drive sprocket which I assume is for clutch adjustment and nothing.

Anyone know where this water and is this bike safe to use in the current condition if I do get spark? and will I need to get a new clutch? 

Check your transmission oil and color if it’s milky then you have water problems as far as spark you need to clean the points really good are you sure it’s water vapor also do you have gas in the carburetor 

Sound like she's been a submarine model, but don't give up yet. If it spins over you're in with a chance. Leave the oil pump cover off. Check theres oil in the oil tank let some bleed out the small screw on the side of the pump for a minute or two & see if it looks ok. Mix some premix petrol for the first run as well. Carburettor is likely a mess but drain it & give it a try. So back to No Spark. You got one spark so give the points a scratch the easiest way you can, then eyeball them opening & closing though the flywheel slot & spin her up on the drill. See what happens. I've had some bad ones running well with little effort & no cost, so best of luck.

Here's one of mine. Looks like i grab the flywheel at the end but was because motor would tighen up to a halt--like a seize. Then instantly free up. Had me head scratching as no noise at all. Ended up that there was SO MUCH carbon down the piston skirt that clearance became zero & a 10 second run would expand & stop it. Kept trying for a bit the pulled the cylinder to find "that". Clean up & pulling wheelies down the drive an hour later. [not down the pumpkin paddock this timelol]. Yamy LS3 100 single sort of where a DT100 came from except the LS3 was a bit of a go fasty rocket & DT is more trail power.

I pull the two covers off you mentioned after washing bike or exposed to rain. Very common to find water there. Water can do a lot of damage if left, hence remove the covers to dry it out.

I always enjoy your videos Morley!