does water damage?

there are alot of variables to answer youre question. yes it will run as long as no water is into the intake and exaust. but also there can be no leak into the magneto/flywheel area, if there is it will hamper the air gap needed to effect the coil. while at that area if there is a crack in a wire it will short at that point if it is submerged in water. the block will not crack unless it is very hot and then submerged for a long time. more conserning is the spark plug it would more than likely crack on the porcilin, causing a miss and die then allowing water into the cylender then if compression occurrs then rod is destroyed and normaly the case and the cylinder/sleve.
any open or bare wire can short if submerged in water, causing it to die.

with all that said, if the engine isnt to hot and all wires are ok(not frayed) and the flywheel/mag. cover is sealed ,and no water is allowed into the intake area then it should be ok.