The water keeps the box cool but some guys have huge gears & have to cut out the water jacket. You don't need water, just like the rear end in your car dosn't need water. For me, by the time I am done getting after it & the boat sets a little bit back down my box has cooled off.
The person who could help answer alot of your questions is Tom Bentley at Menkens V-Drives (530)885-0531. Hope this helped.