Two bulb mastlights are sometimes used in conjunction with a white stern light (attached directly to the transom), although this would be for a stern drive engine. There must be a white light able to be seen from 360* when the boat is running or just floating around. However, that 360* can be split up. So in this case (stern drive), when the boat is moving and the "nav" switch is activated, the forward bulb in the masthead light and the transom light will light up... giving 360*. When just the "anchor" switch is activated, both bulbs in the masthead light will turn on, but NOT the stern light.
Obviously, with an outboard a transom light doesn't work because the OB blocks it. My guess is that Grady simply uses the same masthead light for both an IO and OB and just re-wires the switches. I did the same thing as my boat was originally a sterndrive - I re-wired the switches to eliminate the transom light from the circuit and, even though there are two bulbs in the masthead light (on top of the hardtop), I am essentially treating them as one light as far as the wiring goes.
The goal/requirement is simple for small powerboats - a red and green at the bow, able to be seen aft to a little past 90* and a white light visible 360* (but can be split between a forward facing and aft facing light). It does not HAVE to be split - a single, white, 360* light is just as good. You simply need a white light that can be seen by anyone else, regardless of their relative position. BUT... they should NOT be able to see two white lights at the same time.
StoryTime... sounds like you just have a bad connection (loose/dirty/corroded wire under the sheathing) somewhere.